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Page 1: Australian Innovation System Monitor · Web viewFigure 1.4.3: Global Innovation Index, Innovation output sub-index, top 30 countries, index points, latest 2019 1.4.4 Innovation-active

May 2023 edition

www.industry.gov.au/aismonitor

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Further informationName: Razib TuhinSection: Business Transformation InsightsDepartment of Industry, Science, Energy and Resources GPO Box 9839 Canberra ACT 2601Phone: +61 2 6213 6000Email: [email protected]

Project team

Stan Bucifal (project leader)Heike HeraldAlex StockBriggs Soria

Acknowledgements

The project team wishes to acknowledge the contributions of: Leanne ThompsonIan MoranAzadeh Abbasi ShavasiMahmoud Alinejad Maria Boyle Monique ShearerLaura KusaBen SouthallNic FoxGaminda Ganewatta

ISSN 2207-0680 (Print) ISSN 2207-0699 (Online)

© Commonwealth of Australia 2020

Creative Commons Licence

Attribution 4.0 International LicenceCC BY 4.0

All material in this publication is licensed under a Creative Commons Attribution 4.0 International Licence, with the exception of:

the Commonwealth Coat of Arms; content supplied by third parties; logos; and any material protected by trademark or otherwise

noted in this publication.

Creative Commons Attribution 4.0 International Licence is a standard form licence agreement that allows you to copy, distribute, transmit and adapt this publication provided you attribute the work. A summary of the licence terms is available from https://creativecommons.org/licenses/by/4.0/

Wherever a third party holds copyright in material contained in this publication, the copyright remains with that party. Their permission may be required to use the material. Please contact them directly.

Attribution

Content contained herein should be attributed as follows: Department of Industry, Science, Energy and Resources, Commonwealth of Australia, Australian Innovation System Monitor. The Commonwealth of Australia does not necessarily endorse the content of this publication.

Requests and inquiries concerning reproduction and rights should be addressed to [email protected].

DisclaimerThe views expressed in this report are those of the authors and do not necessarily reflect those of the Australian Government or the Department of Industry, Innovation and Science.

This publication is not legal or professional advice. The Commonwealth of Australia does not guarantee the accuracy or reliability of the information and data in the publication. Third parties rely upon this publication entirely at their own risk.

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Table of ContentsExecutive Summary

Introduction

Latest Updates

COVID-19

COVID-19 impact on Australian businesses

Estimates from the IMF

International trade statistics from the OECD

Australian business innovation from the National Australia Bank

Impact on business and recruitment from the National Skills Commission

1 Business Innovation

1.1 Innovation Activity

1.1.1 Innovation activity overall

1.1.2 Innovation activity by innovation stage

1.1.3 Innovation activity by business size

1.1.4 Innovation activity by industry

1.1.5 Businesses that introduced innovations by innovation type

1.1.6 Novelty of introduced innovations

1.1.7 Barriers to business innovation

1.2 Digital Innovation

1.2.1 Business internet use

1.2.2 Businesses receiving orders via the internet

1.2.3 Business use of cloud computing

1.2.4 Barriers to business use of paid cloud computing

1.2.5 Management practices for business ICT use

1.2.6 Digital technologies of major importance

1.2.7 Factors impacting business ICT use

1.2.8 ICT use in business processes

1.3 Benefits of Innovation

1.3.1 Benefits of introduced innovation

1.3.2 Business performance by innovation status

1.3.3 Employment, productivity and sales outcomes, by innovation status and collaboration

1.4 International Comparison

1.4.1 Global Innovation Index

1.4.2 Global Innovation Index, Innovation input sub-index

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1.4.3 Global Innovation Index, Innovation output sub-index

1.4.4 Innovation-active businesses that are R&D active

2 Entrepreneurship

2.1 Business Demography

2.1.1 Businesses in operation by industry

2.1.2 Business entries and exits by industry

2.1.3 Survival of business entries by industry

2.1.4 Churn rate by industry

2.2 Startup Finance

2.2.1 Value of venture capital investments

2.2.2 Venture capital investment deals

2.3 Business Growth

2.3.1 High-growth firms measured by turnover

2.3.2 High-growth firms measured by employment

2.3.3 Businesses changing turnover range

2.3.4 Businesses changing employment range

2.4 International Comparison

2.4.1 Total early-stage entrepreneurial activity (TEA)

2.4.2 Innovative early-stage entrepreneurial activity

2.4.3 Adults perceiving start-up opportunities for new businesses

2.4.4 Adults prevented from starting a business by fear of failure

3 Science and Research

3.1 Business R&D

3.1.1 Total business expenditure on R&D (BERD)

3.1.2 Business expenditure on R&D (BERD) by industry

3.1.3 Business expenditure on R&D (BERD) as a share of GDP

3.2 Government R&D

3.2.1 Government expenditure on R&D (GovERD) by type of activity

3.2.2 Government expenditure on R&D (GovERD) by location of expenditure

3.2.3 Government expenditure on R&D (GovERD) by level of government

3.2.4 Australian Government investment in R&D

3.2.5 Australian Government investment in R&D by sector

3.2.6 Australian Government investment in R&D by major programs

3.2.7 Civil government budget allocations for R&D (GBARD) by selected socio-economic objectives

3.3 Higher Education R&D

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3.3.1 Higher education resources devoted to R&D (HERD) by type of activity

3.3.2 Higher education resources devoted to R&D (HERD) by location

3.3.3 Higher education resources devoted to R&D (HERD) by source of funds

3.4 Research Output

3.4.1 Share of world scientific publications

3.4.2 Australian research fields with higher-than-world-average citation rates

3.4.3 Scientific publications per $ million non-business R&D

3.4.4 Scientific publications per million population

3.4.5 Share of top one and top ten per cent highly-cited publications

3.5 International Comparison

3.5.1 Gross expenditure on R&D (GERD) as a share of GDP

3.5.2 Gross expenditure on R&D (GERD) as a share of GDP by sector

3.5.3 Business expenditure on R&D (BERD) performed in service industries

4 Networks and Collaboration

4.1 Innovation Connections

4.1.1 Businesses collaborating for the purpose of innovation

4.1.2 Businesses collaborating on innovation

4.1.3 Businesses collaborating on R&D

4.1.4 Businesses collaborating with publicly funded research organisations

4.1.5 Active licences, options and assignments (LOAs) yielding income for research organisations

4.1.6 Income from active licences, options and assignments (LOAs) obtained by research organisations

4.1.7 Consultancies, contracts and research collaborations with research organisations

4.1.8 Total gross value of consultancies, contracts and research collaborations with research organisations

4.2 Absorptive Capacity

4.2.1 Business human resources devoted to R&D

4.2.2 Government human resources devoted to R&D

4.2.3 Higher education human resources devoted to R&D

4.3 Government Engagement

4.3.1 Businesses receiving government financial assistance

4.3.2 Innovation-active businesses receiving public support for innovation

4.3.3 Innovation-active businesses with public procurement contracts

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4.4 International Comparison

4.4.1 Business funding of higher education R&D (HERD)

4.4.2 Businesses collaborating on innovation

4.4.3 Businesses collaborating on innovation with higher education or government institutions

5 Skills and Capability

5.1 Education and Workforce

5.1.1 Adults with school and non-school qualifications

5.1.2 Adults with non-school qualifications by field of study

5.1.3 Adults studying for a non-school qualification by field of study

5.1.4 Apprentices and trainees by occupation

5.1.5 Apprentices and trainees by employer industry

5.2 Innovation Capability

5.2.1 R&D personnel by sector

5.2.2 Innovation-active businesses that operate in international markets

5.2.3 Australian exports with a revealed comparative advantage (RCA) index above two

5.2.4 Selected sources of ideas for innovation

5.3 Intangible Capital

5.3.1 Intangible capital investment

5.3.2 Intangible capital stock

5.3.3 Business investment in intangible capital

5.3.4 Patent family filings involving Australian applicants

5.3.5 Patent family filings involving Australian applicants by technology field

5.4 International Comparison

5.4.1 Total expenditure on educational institutions as a share of GDP

5.4.2 Expenditure on tertiary education institutions as a share of GDP

5.4.3 Adults attaining a tertiary qualification

5.4.4 Adults attaining a vocational qualification

5.4.5 Government effectiveness

5.4.6 Regulatory quality

Citations

Glossary

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Executive Summary

The AIS Monitor offers an interpretation of innovation-related data collected and published prior to the COVID-19 outbreak. As such, the impacts of the pandemic and the government measures to contain it will not show up in the data for some time. In the interim, the COVID-19 page provides key estimates and information related to the impact of COVID-19 on business activity, including innovation. The AIS Monitor content should be interpreted in this new context.

Over the last decade, the proportion of innovation-active businesses has increased to nearly a half of all employing businesses. Increasingly they undertake a range of business operations online, including financial management, information sharing and staff training. Social media is also becoming a widely-adopted channel for marketing, communication and recruitment. However, the majority of Australian businesses opt for adapting existing innovations rather than introducing more novel ones. These businesses report facing barriers such as a lack of relevant skills and restricted access to funds.

Notwithstanding some emerging downside risks in the broader economy, the evidence on entrepreneurial activity is generally positive. Measures such as number of Australian adults starting a business, perceptions of business opportunity and job creation expected from new business ventures are all above OECD average. However, compared to a decade ago, relatively fewer entrepreneurs are now entering the market and those that enter are more likely to exit than those that entered in earlier years. Among the likely contributing factors are fear of failure and limited access to finance and skills.

Aggregate expenditure on R&D as a share of GDP has declined recently, driven primarily by sharp falls in business expenditure on R&D in the mining and manufacturing industries. Government investment in R&D has been relatively flat in recent times, although on a longer timescale the trend in public funding of R&D is increasing. In terms of research output, the science and research sector has increased its share of world-class publications and citations — which is evidence of Australia's strength in knowledge creation.

Compared to other OECD countries, Australia has relatively modest proportions of (product and/or process) innovative businesses receiving public support for innovation or being engaged in public procurement contracts. There remains an opportunity to strengthen collaboration between businesses and the research sector to maximise commercial benefit from Australia's world-class research.

Australia boasts a relatively high aggregate level of expenditure on educational institutions as a share of GDP compared to other OECD countries, and a high proportion of the adult population with tertiary qualifications. In terms of intangible capital stock, R&D and mining exploration continue to dominate, and computer software has seen strong sustained investment growth for more than a decade. Going forward, boosting innovation capability, matching tertiary qualifications to relevant professions, and the uptake of digital, intangible and human capital, will be increasingly important for Australia's economic growth.

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Introduction

Innovation helps businesses improve their efficiency, solve everyday problems and drive long-term job creation. It is also a key driver of productivity growth and economic renewal. At the national level, an innovation system is an open network of actors clustered in various geographical locations who interact within an institutional, cultural and regulatory environment. These clusters are distributed unevenly across multiple geographical locations, industries and economic niches. Within the innovation system, individuals and organisations are mutually interdependent but not always well-connected. Their activities and interactions within, and between, their immediate clusters are also fundamentally influenced by broader regional, national and international factors.

The many interactions occurring simultaneously and iteratively over different time scales drive the overall performance of the system as a whole. The system's aggregate behaviour is complex, non-linear, and its properties are emergent. These processes are difficult to summarise without sacrificing important detail. The innovation systems approach attempts to map out the key components and linkages between them, using a variety of measures and techniques adopted from multiple disciplines. Despite the lack of a theoretical foundation for which it is sometimes criticised, this approach is tractable for policy because it highlights the key features of the innovation system plainly, as they are empirically observed.

Since 2010, the Australian Innovation System (AIS) Report has been tracking Australia's innovation performance and characteristics in an annual, hard copy publication. Since July 2019, the report has been published in a fully digital format. The new digital AIS Monitor continues in the tradition of providing high-quality metrics from reputable sources with expert commentary and analysis. It introduces some exciting new features to improve the publication's utility, including interactive charts, downloadable datasets converted to a machine-readable format, and links to complementary analytical work.

The AIS Monitor offers an interpretation of innovation-related data collected and published prior to the COVID-19 outbreak. As such, the impacts of the pandemic and the government measures to contain it will not show up in the data for some time. In the interim, the COVID-19 page provides key estimates and information related to the impact of COVID-19 on business activity, including innovation. The AIS Monitor content should be interpreted in this new context.

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Latest Updates

September 2020 edition

The Australian Innovation System Monitor – September 2020 edition provides updated data on the impact of the COVID-19 pandemic on Australian businesses and the government measures to contain it. It also presents new and updated analyses.

All interactive charts in this edition have been re-built using the Plotly R open source graphing library1. As a result, the charts load faster and more reliably than under previous editions. A new Downloads page has also been added to give users access to all the data and snapshots in the AIS Monitor in one place.

To keep improving the AIS Monitor the project team invites your feedback, which can be submitted via the feedback form link provided on each page or by email to [email protected].

The following data releases have been incorporated:

• ABS Business Indicators, Business Impacts of COVID-19, August 2020

• OECD International trade statistics: trends in second quarter 2020, August 2020

• National Skills Commission Impacts of COVID-19, August 2020

• OECD Main Science and Technology Indicators 2020/1, OECD Publishing

• European Patent Office PATSTAT 2020: Spring edition

• NCVER VOCSTATS National Apprentice and Trainee Collection, August 2020

The COVID-19 page has been updated with information from the July and August 2020 releases of the ABS Business Impacts of COVID-19 survey. Information from the OECD and the National Skills Commission have been updated from newer reports. See COVID-19 page >>

The OECD has published their Main Science and Technology Indicators for the first half of 2020. This release provides updated data on Australia's spending on R&D. South Korea and Germany have the greatest higher education expenditure on R&D as a proportion of GDP. Go to sections 3.2, 3.5, 4.4, 5.2 >>

Data from the European Patent Office on patent family filings have been updated. The total number of family filings each year has remained relatively stable. Patent family filings were most concentrated in the Civil engineering technology field with 429 patent families filed in 2017. Go to sections 4.1, 5.3 >>

The National Centre for Vocational Education Research has released National Apprentice and Trainee data for 2019. This shows that trends that began in 2012 have continued in 2019. Go to section 5.1 >>

Last updated: 4 September 2020

1 Plotly (2020) Plotly R open source graphing library (https://plotly.com/r/)

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COVID-19

The Australian Innovation System Monitor (AIS Monitor) offers an interpretation of innovation-related data collected and published prior to the COVID-19 outbreak. As such, the impacts of the pandemic and the government measures to contain it will not show up in the data for some time. In the interim, below are key estimates and information related to the impact of COVID-19 on business activity, including innovation. The AIS Monitor content should be interpreted in this new context.

COVID-19 impact on Australian businesses

The ABS has conducted seven telephone surveys to collect impact information from businesses — the most recent from 12 August to 19 August 2020. The combined results shed light on the business impacts from March to August 2020.2

Operating status and modifications to operations

• Seven in 10 businesses (73 per cent) are operating under modified conditions. Large businesses were most affected with 85 per cent of businesses employing 200 or more persons operating under modified conditions.

• The industries most affected are Information media and telecommunications (89 per cent), Education and training (89 per cent) and Manufacturing (84 per cent).

• The Mining industry was least affected with only 53 per cent of businesses operating under modified conditions.

• The most common modification was the Introduction of new hygiene protocols and practices (65 per cent). This modification was implemented by 93 per cent of Health care and social assistance businesses, 85 per cent of Accommodation and food services businesses and 84 per cent of Retail trade businesses.

• The second most common modification was Limitations to the number of people on site (57 per cent). This was implemented by 88 per cent of Accommodation and food services businesses and 83 per cent of Health care and social assistance businesses.

Revenue impact

• More than two businesses in five of (41 per cent) reported that revenue had decreased over the last month. The industry most likely to report decreased revenue was Retail trade (56 per cent).

• More than two in seven businesses (28 per cent) expect revenue to decrease in the next month. The industry most likely to expect decreased revenue was Wholesale trade (36 per cent).

• More than six in ten businesses (66 per cent) reported that revenue had decreased compared to the same time last year. Revenue decreased for 73 per cent of businesses operating under modified conditions and 39 per cent of businesses operating as normal.

• Reduced revenue most affected the Education and training industry (87 per cent) and the Accommodation and food services industry (84 per cent).

• The Mining industry was least affected by reduced revenue, with 33 per cent of Mining businesses reporting decreased revenue over the past year.

2 ABS (2020) Business Impacts of COVID-19, Cat. No. 5676.0.55.003 (https://www.abs.gov.au/ausstats/[email protected]/mf/5676.0.55.003)

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• One in five (20 per cent) businesses reported that their revenue had decreased by 50 per cent or more over the past year. Nine per cent of businesses reported that their revenue had decreased by 75 per cent or more.

• Less than one in 10 of all businesses (8 per cent) reported that revenue had increased compared to the same time last year.

Operating expenses

• More than one in five businesses (22 per cent) reported increased operating expenses over the last month. Around one in ten businesses (11 per cent) reported decreased operating expenses over the same period.

• Medium businesses (employing 20 to 199 persons) were most likely to report increased operating expenses (28 per cent).

• The industries most likely to report increased operating expenses were Rental, hiring and real estate services (35 per cent) and Accommodation and food services (30 per cent).

Support measures and additional funds

• Around two businesses in five (42 per cent) accessed available business support measures. This is down from 73 per cent in May 2020.

• More than half (53 per cent) of all medium businesses (employing 20 to 199 persons) accessed support measures. The industry with the most businesses accessing support measures was Accommodation and food services (66 per cent).

• When support measures are no longer available, 39 per cent of businesses currently receiving support plan to defer or cancel investment plans; 33 per cent plan to change the quantity of their orders of inputs (e.g. stock or raw materials); and 32 per cent plan to reduce their workforce. Nearly one in four businesses currently receiving support (24 per cent) plan to close when support is no longer available.

Meeting financial commitments

• More than one in three (35 per cent) businesses reported that it would be Difficult or Very difficult to meet financial commitments over the next three months. Small businesses (employing 0 to 19 persons) were most affected (35 per cent).

• The industries having the most difficulty meeting its financial commitments were Accommodation and food services (71 per cent reporting Difficult or Very difficult) and Transport, postal and warehousing (56 per cent).

Capital Expenditure

• More than three in four businesses (76 per cent) reported at least one factor influencing business expenditure on capital. The most significant factors were Uncertainty about the future state of the economy (59 per cent) and Expected future customer demand (40 per cent).

• Medium sized businesses (employing 20 to 199 persons) were most likely to report at least one factor influencing their capital expenditure (81 per cent).

• The industries most likely to report at least one factor influencing their capital expenditure were Manufacturing (91 per cent), Construction (86 per cent) and Retail trade (85 per cent).

• Nearly one in four businesses (23 per cent) reported that they had Decreased or Cancelled their actual or planned capital expenditure. 25 per cent reported that capital expenditure had stayed

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the same. 12 per cent reported that they had Increased their actual or planned capital expenditure.

• The industries most likely to decrease or cancel their capital expenditure were Accommodation and food services (40 per cent reporting Decreased or Cancelled), Electricity, gas, water and waste services (35 per cent) and Rental, hiring and real estate services (35 per cent).

• Nearly three in 10 businesses (28 per cent) had any capital expenditure intentions over the next three months. Large businesses (employing 200 or more persons) were much more likely to report intended capital expenditure (55 per cent).

• The most common types of intended capital expenditure were IT hardware or software (16 per cent) and Other equipment or machinery (16 per cent).

• The industries most likely to have capital expenditure intentions were Financial and insurance services (37 per cent), Other services (35 per cent) and Construction (32 per cent).

Boosting Cash Flow for Employers measure

• More than half of all businesses (54 per cent) have received support from the Boosting Cash Flow for Employers measure. Medium businesses (employing 20 to 199 persons) were the most likely to receive this support (63 per cent). The industry receiving the most support was Financial and insurance services (74 per cent).

• Businesses that received a cash flow boost most commonly used it to support employees (i.e. pay wages or salaries) (61 per cent) and to pay fixed costs (56 per cent).

• Of businesses that were aware of the measure but did not receive support, more than two in three (69 per cent) were not eligible.

Employee arrangements

• Less than one in 10 businesses (8 per cent) reported a decrease in employees in the last month. Medium businesses (employing 20 to 199 persons) were most likely to report a decrease (21 per cent). The industry most likely to decrease employees was Administrative and support services (22 per cent).

• Only 5 per cent of businesses expect a decrease in employees next month. Six percent of businesses expect an increase.

• More than half of all businesses (57 per cent) made changes to employee arrangements. 53 per cent of businesses reduced the hours worked by currently employed staff, while 24 per cent reduced their total employees.

• Large businesses were most likely to change their employee arrangements. 72 per cent of businesses employing 200 or more persons made changes to employee arrangements. 51 per cent of large businesses reduced staff hours and 41 per cent reduced total employees.

• The industries most likely to have changed employee arrangements are Accommodation and food services (91 per cent) and Wholesale trade (81 per cent). The Mining industry is least likely to have changed employee arrangements (9 per cent).

Workforce difficulties

• Around one in nine employing businesses (11 per cent) experienced difficulties in filling job vacancies. Medium businesses (employing 20 to 199 persons) were almost twice as likely as average (19 per cent) to experience this difficulty. The industry that experienced the most difficulty was Electricity, gas, water and waste services (29 per cent).

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• Around one in 11 employing businesses (9 per cent) experienced difficulty in meeting sufficient staffing levels with existing employees. Medium businesses (employing 20 to 199 persons) had a higher than average chance (16 per cent) of experiencing this difficulty. The industry that experienced the most difficulty was Retail trade (32 per cent).

• Around three in 10 employing businesses (31 per cent) experienced one or more issues in negotiating work arrangements with employees. The most common reported issues were Change of work location (16 per cent). The industry that experienced the most issues was Administrative and support services (65 per cent).

Return to pre-COVID-19 business conditions

• In order to return to pre-COVID-19 business conditions, 35 per cent of businesses required Increased or returning customer demand in addition to the relaxation of government restrictions. 29 per cent of businesses required only the relaxation of government restrictions.

• Nearly one in three (33 per cent) businesses employing 200 or more persons required only the relaxation of government restrictions to return to pre-COVID-19 business conditions.

External advice

• Three in five businesses (60 per cent) sought external advice in response to COVID-19.

• More than one in two businesses (52 per cent) sought advice on Government support measures available; 45 per cent on Regulation and compliance; and 39 per cent on Health and safety.

• Nearly one in two businesses (49 per cent) sought advice from Private organisations, (including bank, lawyer, accountants). 38 per cent sought advice from a Federal government agency and 35 per cent sought advice from a State government agency.

How businesses responded to the impacts

• Product and process related changes, such as changing the method of delivery of products or services, including a shift to online services was reported by almost four out of 10 (38 per cent) businesses, while only one out of 10 (10 per cent) reported having introduced new products.

• Changing the method of delivery of products or services, including a shift to online, were most commonly reported by: Accommodation and food services (66 per cent); Health care and social assistance (66 per cent); Education and training (57 per cent); Other services (57 per cent); and Information, media and telecommunications (56 per cent).

Estimates from the IMF

• The COVID-19 pandemic is inflicting high human and economic costs worldwide. The IMF projects the global economy to contract sharply by 4.9 per cent in 2020 a result of the pandemic, much worse than during the 2008–09 financial crisis. Australia's real GDP is expected to shrink by 4.5 per cent.

• The unprecedented measures to contain the outbreak have inevitably led to temporary business closures, widespread restrictions on travel and mobility, financial market turmoil, an erosion of confidence and considerable uncertainty.

• The current recession is unlike previous recessions in its effect on consumption and services output. In other recessions, like the global financial crisis, consumers drew on their reserves, which smoothed their spending and lessened the impact on consumption. In the current recession, consumption and service outputs have dropped markedly due to steep income losses and weak consumer confidence.

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• Widespread school closures in about 150 countries as of the end of May, affect close to 1.2 billion school children (nearly 70 percent of the global total). This will result in significant loss of learning, with consequences felt for years to come.3

International trade statistics from the OECD

• COVID-19 related lockdown measures hit international trade hard in the first and second quarters of 2020. Compared to the first quarter, global exports fell by 17.7 per cent and imports by 16.7 per cent. This is the largest fall since the 2009 financial crisis.

• Monthly data shows that trade collapsed in March and April, and partially recovered in May and June.

• Australia registered only single-digit falls in the second quarter of 2020, with exports down by 4.4 per cent and imports down by 5.6 per cent.

• China was the only G20 economy to record export growth in the second quarter of 2020 (up by 9.1 per cent), but still recorded a fall in imports of 4.9 per cent.4

Australian business innovation from the National Australia Bank

• Business innovation in Australia — as measured by the National Australia Bank's Business Innovation Index — has fallen significantly in the wake of the COVID-19 pandemic. However, this measure fails to show how businesses are applying their ingenuity to adapt to a new world.

• The Business Innovation Index measures innovation by the extent to which a business changes anything that allows it to do things differently, more quickly or more cost efficiently. Widespread supply-chain and cash flow disruptions, forced business closures and labour shedding has impaired businesses' ability to do things more quickly or more cost efficiently. These measures have fallen heavily, and reduced the overall Business Innovation Index for 2020.

• However, the challenges of the COVID-19 crisis have encouraged businesses to do things differently. This measure of innovation has risen dramatically.

• In 2020, the most innovative sectors were Recreational and personal services; Accommodation; and Cafes and restaurants. These industries reported a dramatic increase in doing things differently relative to 2019, and were the only industries to report higher innovation overall.

• Businesses were asked to rate the extent that changes would be retained after the COVID-19 pandemic. The results suggest that many recent innovations will be longer lasting.5

Impact on business and recruitment from the National Skills Commission

The National Skills Commission is conducting a survey of businesses to measure the impact of COVID-19. Data is collected on staffing changes, business impacts, actions taken by businesses in response to the pandemic, and future expectations.

Staffing expectations

3 IMF (2020) World Economic Outlook Update, June 2020 (https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020)

4 OECD (2020) International trade statistics: trends in second quarter 2020, August 2020 (http://www.oecd.org/sdd/its/international-trade-statistics-trends-in-second-quarter-2020.htm)

5 NAB (2020) Business Innovation Index, July 2020, unpublished, previous edition linked (https://business.nab.com.au/nab-business-innovation-index-2019-38055/)

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• Expectations of increased staffing levels fell in the last half of July 2020. In the week ending 31 July 2020, 14 per cent of businesses expected to increase staffing levels, compared to 21 per cent in the week ending 10 July 2020.

• This fall was driven by staffing expectations in Victoria and New South Wales. In the week ending 10 July 2020, 18 per cent of Victorian businesses and 12 per cent of New South Wales businesses expected to increase staffing levels. In the week ending 31 July 2020, these had fallen to 10 per cent and 8 per cent respectively.

• In the week ending 31 July 2020, 7 per cent of businesses expected to decrease staffing levels in the coming months. This is the highest level since the beginning of May.6

• Businesses in Accommodation and food services were most likely to expect increased staffing levels (35 per cent in the four weeks to 26 June 2020). This is due to easing restrictions allowing many cafés and restaurants to re-open.

• Businesses in Wholesale trade and Professional, scientific and technical services were the least likely to expect increased staffing levels (8 per cent in the four weeks to 26 June 2020).

Confidence in remaining open

• In June 2020, the vast majority of businesses (92 per cent) were either Confident or Very confident that they would be able to stay open for the next six months.

• Nearly three quarters (74 per cent) of businesses in Wholesale trade were Very confident of staying open, as were 71 per cent of Retail trade businesses. Just over half of businesses in Accommodation and food services were Very confident of staying open.7

Operation capacity

• In the fortnight ending 31 July 2020, 52 per cent of businesses reported operating at full capacity. This has changed little over June and July 2020.

• Nearly two in three (66 per cent) of Retail trade businesses were operating at full capacity, while less than one in three (30 per cent) of Accommodation and food services businesses were.

• The proportion of small businesses (less than 20 staff) operating at full capacity rose from 47 per cent in June 2020 to 54 per cent in July 2020. The proportion of medium and large businesses (20 or more staff) fell in the same period from 58 per cent to 56 per cent.

• Businesses not operating at full capacity were less optimistic about staffing levels. 80 per cent of businesses not operating at full capacity expected their staffing levels to stay the same or increase, while 94 per cent of businesses operating at full capacity expected the same.

• Businesses not operating at full capacity were less confident about their prospects of staying open. 89 per cent of businesses not operating at full capacity were either Very confident or Somewhat confident of staying open for the next six months, compared to 96 per cent of businesses operating at full capacity.8

Perceived risks to staying open

6 National Skills Commission (2020) Impacts of COVID-19 on businesses – update on future staffing expectations, August 2020 (https://lmip.gov.au/PortalFile.axd?FieldID=3193824&.pdf)

7 National Skills Commission (2020) Impacts of COVID-19 on businesses – future staffing expectations and business confidence, July 2020 (https://lmip.gov.au/PortalFile.axd?FieldID=3193699&.pdf)

8 National Skills Commission (2020) Impacts of COVID-19 on businesses – Business' operating capacity, August 2020 (https://lmip.gov.au/PortalFile.axd?FieldID=3193834&.pdf)

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• Half of surveyed businesses (50 per cent) reported that Another COVID-19 outbreak was a risk of staying open for the next six months. 30 percent reported the risk of Employee contracting COVID-19, and 25 per cent reported the risk of Government restrictions.

• The risk of Another COVID-19 outbreak was most reported by Accommodation and food services businesses (75 per cent).

• The risk of Employee contracting COVID-19 was most reported by Health care and social assistance businesses (46 per cent).

• The risk of Government restrictions was most reported by Accommodation and food services businesses (47 per cent).

• Small businesses (less than 20 staff) were less likely than medium or large businesses (20 or more staff) to report the risks of Another COVID-19 outbreak (49 per cent for small businesses, 54 per cent for medium and large businesses) and Employee contracting COVID-19 (28 per cent for small businesses, 37 per cent for medium or large businesses).

• Small businesses were more likely than medium or large businesses to report the risk of Government restrictions (25 per cent for small businesses, 23 per cent for medium and large businesses).9

9 National Skills Commission (2020) Impacts of COVID-19 – risks to businesses staying open, July 2020 (https://lmip.gov.au/PortalFile.axd?FieldID=3193763&.pdf)

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1 Business InnovationThe content of this chapter draws on data collected and published prior to the COVID-19 outbreak. Until new data becomes available, the COVID-19 page provides some key estimates and information related to the impact of COVID-19 on business activity.

The Australian economy is in transition. Once a nation that relied heavily on its agricultural exports and manufacturing, Australia is moving towards more digitally-enabled, service-oriented industries, on the back of its strength in mining. As the global economy becomes more integrated, the relative advantages of businesses and regions are changing in terms of trade and investment patterns. And with continuing technological advances, businesses and consumers are also changing their behaviours. Innovation in various forms plays a central role in this process.

Australian businesses have been innovating more than ever and reaping the rewards. The number of innovation-active businesses has steadily increased over the last 10 years, with reported benefits ranging from increased revenue to improved customer service and reduction in costs. Australian businesses generally tend to opt for adapting innovations developed by other parties, rather than introducing more novel kinds. They report barriers to undertaking innovation activity such as lack of skills and access to funds. New technologies continue to re-define what is traded, in turn presenting new export opportunities.

Digital technology is revolutionising business. A growing number of businesses use online services for managing finances, sharing information, staff training and other business activities. Social media usage has grown rapidly with more and more firms using it as a new channel for marketing, communication and recruitment. Access to reliable digital infrastructure, including mobile internet and high-speed broadband, is considered crucial as more Australian businesses introduce formal management practices to complement their substantial ICT investments. Against this backdrop, globalisation has accelerated the spread of new technologies and services, as well as new players with connections to international markets.10

10 Department of Industry, Innovation and Science (2018) Industry Insights: Globalising Australia, Office of the Chief Economist report 2/2018 (https://publications.industry.gov.au/publications/industryinsightsjune2018/documents/IndustryInsights_2_2018_ONLINE.pdf)

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1.1 Innovation Activity

1.1.1 Innovation activity overall

The proportion of businesses undertaking innovation is a key measure of performance in the innovation system. Based on survey data published by the Australian Bureau of Statistics (ABS), about half (43.9 per cent) of all Australian businesses identified as Innovation-active businesses in 2018–19, which is a 0.6 percentage point decrease compared to 2016–17, the previous year when innovation statistics were in focus. This means that these businesses undertook any innovative activity irrespective of whether the innovation was introduced, still in development or abandoned during the reference period.11 The data for this indicator are collected through the Characteristics of Australian Business survey which alternates from year to year based on its focus on either innovation or business use of information technology, resulting in two slightly different versions of the same data series, both of which are displayed in the chart. It is recommended the same version be used when looking at the estimates over time.

Figure 1.1.1: Innovation-active businesses, share of all businesses, per cent, latest 2018–19

11 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.1.2 Innovation activity by innovation stage

Survey data published by the Australian Bureau of Statistics (ABS) cover three stages of innovation (introduced, still in development, and abandoned). In 2018–19, 43.9 per cent of Australian businesses were innovation-active, which means they were involved in at least one of these stages of innovation over the last 12 months. As a share of all businesses, one third (36.9 per cent) had introduced or implemented their innovation, 24.0 per cent were still developing their innovation and 9.3 per cent had abandoned some innovative ideas. These proportions have remained relatively stable since 2012–13, however recent data also shows a rise in Innovation which is still in development and Innovation which has been abandoned.12

Figure 1.1.2: Innovation-active businesses, share of all businesses, by innovation stage, per cent, latest 2018–19

12 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.1.3 Innovation activity by business size

Innovation activity increases significantly with business size. In 2018–19, 60.7 per cent of large businesses (200 or more employees) were innovation active, compared to just 36.7 per cent of micro businesses (0–4 employees). In recent years, there has been continued decline in the share of large innovation-active businesses from a high of 74.3 per cent in 2012–13 to just 60.7 per cent in 2018–19, which is now very similar to the share of innovation activity within medium businesses (20–199 employees).13

Figure 1.1.3: Innovation-active businesses, share of all businesses, by business size, per cent, latest 2018–19

13 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.1.4 Innovation activity by industry

Innovation activity also varies by industry. In 2018–19, the Wholesale trade industry had the largest share of innovation-active business (60.9 per cent), followed by Manufacturing (59.5 per cent) and Information media and telecommunications (56 per cent). These three industries also had the largest shares in 2008–09. In the last 10 years within each industry, the share of innovation-active businesses has increased, with the largest gains made in the Health care and social assistance and Electricity, gas, water and waste industries.14

Figure 1.1.4: Innovation-active businesses, share of all businesses, by industry, per cent, latest 2018–19

14 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.1.5 Businesses that introduced innovations by innovation type

Innovating businesses are those that introduced at least one type of innovation during the reference period and are a subset of innovation-active businesses. Just over half of all medium (20–199 employees) and large (200 or more employees) businesses introduced innovations in 2018–19 compared to only one third of micro businesses (0–4 employees). The 2018–19 survey captures all innovation under two types, namely goods and services and process innovation, down from four types of innovation (goods and services, operational processes, organisational/managerial processes, and marketing methods) in previous years. Changes are due to updates to the international innovation standards and concepts, captured in the Oslo Manual 2018.15 The ABS noted in its release that these conceptual changes need to be taken into consideration when comparing innovation data from previous cycles, particularly within innovation types. In 2018–19, more businesses introduced Process innovations than Goods and services innovations.16

Figure 1.1.5: Businesses that introduced innovations, share of all businesses, by innovation type, by business size, based on Oslo Manual (4th edition), per cent, latest 2018–19

15 OECD and Eurostat (2018), Oslo Manual 2018 – Guidelines for collecting, reporting and using data on innovation (4th Edition), OECD Publishing (https://www.oecd-ilibrary.org/science-and-technology/oslo-manual-2018_9789264304604-en)

16 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.1.6 Novelty of introduced innovations

Australian businesses tend to specialise in modifying innovations introduced by other businesses also operating in the domestic market. Roughly three quarters of all innovation in goods and services and almost 90 per cent of all process innovation introduced by Australian businesses is New to the business only. Large businesses are generally more likely than SMEs to introduce innovation that is New to the industry. In 2018–19, only 9.2 per cent of goods and services innovation was New to Australia and 9.1 per cent was New to the world. The ability of so many Australian innovating businesses to successfully execute this relatively simple 'adopt and adapt' strategy is arguably a strength of Australia's innovation system. However, excessive focus on domestic modification may adversely affect Australia's international competitiveness, since innovations with higher degrees of novelty areas generally more valuable, both domestically and internationally.17

Figure 1.1.6: Novelty of introduced innovations, share of innovating businesses, per cent, latest 2018–19

17 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.1.7 Barriers to business innovation

Recent survey data reflects business' perceptions regarding the barriers that are most likely to derail their innovation activities or dissuade them from innovating. The most commonly reported barriers across both innovators and non-innovators include a Lack of access to additional funds and a Lack of skilled persons. Although there is no clear evidence that access to business finance is a widespread problem in Australia, a 2015 inquiry into business lending found that innovative businesses are more likely to face difficulties than non-innovators.18 Businesses reported that barriers related to Government regulations and compliance were not particularly significant, while Adherence to standards and Lack of access to knowledge or technology were reported the least.19

Figure 1.1.7: Barriers to business innovation, by innovation status, per cent, latest 2018–19

18 Productivity Commission (2015) Business Set-up, Transfer and Closure, Productivity Commission inquiry report no 75, December (https://www.pc.gov.au/inquiries/completed/business/report)

19 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.2 Digital Innovation

1.2.1 Business internet use

Almost all Australian businesses now have internet access (97 per cent in 2018–19) and many are transitioning their broadband connection to a fibre connection, especially large businesses (200 or more employees) (data not shown). For the last 10 years, businesses have steadily integrated internet-enabled services into their business operations. By far the most common use of the internet continues to be to Manage financial activities at 89.3 per cent in 2017–18, up from 82.3 per cent in 2007–08. All other uses were not as well established in 2007–08, but they have grown considerably. Most notable is that workers have become increasingly mobile. Being able to Work remotely from home or other locations has reached 89.3 per cent in 2017–18, up from 36.3 per cent in 2007–08. Over a third of businesses now also use the internet to Communicate, Share information, Receive online training and Assess current products.20

Figure 1.2.1: Business internet use, per cent, latest 2017–18

20 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.2.2 Businesses receiving orders via the internet

The share of businesses receiving orders via the internet indicates the extent of e-commerce as well as the state of business infrastructure necessary to support this. Since 2006–07, there has been a consistent increase in the share of businesses, both innovation-active and non-innovation-active, selling goods and services online. Innovation-active businesses are significantly more likely to do so, reaching 51.2 per cent in 2018–19 compared to 33.7 per cent for Non-innovation-active businesses.21

Figure 1.2.2: Business that reported receiving orders via the internet, by innovation status, per cent, latest 2018–19

21 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.2.3 Business use of cloud computing

Cloud computing is a relatively recent technology focused on delivering ICT resources (e.g. software, storage or processing capacity) as a virtualised service over the internet on an on-demand or pay-per-use basis.22 The share of businesses using cloud computing has rapidly increased from 19.4 per cent in 2013–14 to 42.4 per cent in 2017–18. For those businesses that used cloud computing services in 2017–18, Software-as-a-service was the most commonly purchased service (88.6 per cent), followed by Storage capacity (61.1 per cent). By business size (data not shown), 35.5 per cent of micro businesses (0–4 employees), 50.1 per cent of other small businesses (5–19 employees), 65.7 per cent of medium-sized businesses (20–199 employees), and 76.4 per cent of large businesses (200+ employees) reported using paid cloud computing services. By industry sector (data not shown), Information media and telecommunications had the highest proportion of businesses using such services (63.5 per cent), followed by Professional, scientific and technical services (58.1 per cent) and Financial and insurance services (55.6 per cent).23

Figure 1.2.3: Business use of cloud computing, per cent, latest 2017–18

22 Jadeja, Y & Modi, K (2012) Cloud computing – concepts, architecture and challenges, Article (https://www.researchgate.net/publication/254035330_Cloud_computing_-_concepts_architecture_and_challenges)

23 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.2.4 Barriers to business use of paid cloud computing

In the presence of reliable high-speed internet, cloud computing can deliver a number of benefits that amount to a superior ICT service at lower cost compared to traditional models. While the majority of surveyed Australian businesses increasingly report that no factors are limiting their use of paid cloud computing services (65.7 per cent in 2017–18, up from 58.7 per cent in 2013–14), some businesses have identified limitations, although levels are almost unchanged between 2015–16 and 2017–18. In 2017–18, Insufficient knowledge of cloud computing services (17.2 per cent) was the most common limiting factor, followed by Security breach risk (13.3 per cent) and High cost (11.1 per cent).24 This suggests that there is potential for wider uptake of cloud computing services by Australian businesses, once these factors are addressed.

Figure 1.2.4: Barriers to business use of paid cloud computing, per cent, latest 2017–18

24 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.2.5 Management practices for business ICT use

Digital technologies offer substantial productivity gains to businesses and their employees, as well as flow-on spillover benefits in terms of skill and capability development. The size of those gains relies in part on the effective management of ICT assets, skills, training, and support services. Around one third of Australian businesses implemented at least one management practice for the use of ICT in 2017–18 (31.2 per cent), which is a slight increase of 1.7 percentage points from 2015–16. In 2017–18, the most common management practice was Improved security through implementing upgrades to cybersecurity software, standards or protocols (13.5 per cent), followed by contracting external IT consultants (12.2 per cent) and Staff training (10.7 per cent). Other management practices reported include investing in new Digital technologies (9.5 per cent) and introducing Digital strategies (7.3 per cent).25

Figure 1.2.5: Management practices for business ICT use, per cent, latest 2017–18

25 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.2.6 Digital technologies of major importance

Mobility and operational flexibility are increasingly important to business performance. Digital technologies can facilitate this flexibility, for instance, through remote access or convenient service delivery to customers and end users. In 2017–18, more than half of all businesses with internet access reported that Mobile internet access was of major importance to their business (57.8 per cent), followed closely by High-speed broadband internet access (50.4 per cent). Further, Cloud technology (27.0 per cent) is becoming increasingly important. Whilst the importance of each type of digital technology has increased since 2015–16, many technologies continue to not be ranked by businesses as being of major importance, for instance, Intelligent software systems (7.2 per cent) and Data analytics (5.2 per cent).26

Figure 1.2.6: Digital technologies of major importance, share of businesses with internet access, per cent, latest 2017–18

26 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.2.7 Factors impacting business ICT use

The introduction of new technologies entails not only opportunities but also challenges. In pursuing productivity gains through the uptake of digital technologies, businesses often need to adjust their business practices and resources to complement their ICT assets. The evidence suggests that these factors do not represent substantial obstacles for Australian businesses. The vast majority of businesses surveyed (72.3 per cent in 2017–18 and 74.5 per cent in 2015–16) did not identify any obvious factors as having fundamentally changed their use of ICT. In 2017–18, when they did identify some factors that changed their use of ICT the most commonly reported ones included Spam (7.6 per cent), Lack of access to digital infrastructure (7.7 per cent), and Enhanced need for digital skills and capability (7.7 per cent).27

Figure 1.2.7: Factors impacting business ICT use, per cent, latest 2017–18

27 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.2.8 ICT use in business processes

The use of ICT has increased gradually over the last six years. In 2017–18, Australian businesses used ICT most extensively for Accounting (66.8 per cent), followed by Invoicing (60.5 per cent) and Human resources (48.1 per cent) purposes. On the other hand, only 17.0 per cent of businesses use ICT in Stock control. The share of businesses using ICT extensively tends to increase with business size (data not shown). For example, in 2017–18 in the case of ICT use for Business planning (20.4 per cent), business proportions were 16.5 per cent for micro businesses (0–4 employees), 22.0 per cent for small businesses (5–19 employees), 38.1 per cent for medium-sized businesses (20–199 employees) and 61.5 per cent for large businesses (200 or more employees). This pattern may in part reflect differences in business requirements at different scales of operation.28

Figure 1.2.8: ICT use in business processes, per cent, latest 2017–18

28 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.3 Benefits of Innovation

1.3.1 Benefits of introduced innovation

Most Australian innovation-active businesses (89.4 per cent in 2018–19) report having reaped some kind of benefit from innovation. Improved customer service and Increased revenue have been the most frequently reported benefits over the period from 2010–11 to 2018–19. In responding to this survey question, innovation-active businesses could identify more than one type of benefit. In each iteration of the survey, roughly a quarter to a third of businesses say that it is Too early to measure the benefits of innovation for the given reference period of one financial year. This suggests that at least some are pursuing longer-term investments.29 In addition to these direct benefits, innovation often provides spillover benefits that accrue to local industries, communities and the rest of society.

Figure 1.3.1: Benefits of introduced innovation, share of innovation-active businesses, per cent, latest 2018–19

29 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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1.3.2 Business performance by innovation status

Compared to Australian businesses that do not innovate, a significantly larger proportion of innovation-active businesses consistently report increased sales, profitability, productivity, and other growth-related performance measures. For example, in 2017–18 and 2018–19 innovation-active businesses were over seven times more likely to report improved performance in targeting export markets compared to the previous year. The performance measures and activities with the largest reported improvements from the previous year are consistently product sales, profitability and productivity.30 Furthermore, the positive impact of innovation gets stronger when businesses innovate more frequently. Persistent innovators significantly outperform other businesses in terms of sales, value added, employment and profit growth.31

Figure 1.3.2: Business performance, by innovation status, per cent, latest 2018–19

30 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

31 Department of Industry, Innovation and Science (2016) Australian Innovation System Report 2016, Office of the Chief Economist (https://www.industry.gov.au/data-and-publications/australian-innovation-system-report/australian-innovation-system-report-2016)

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1.3.3 Employment, productivity and sales outcomes, by innovation status and collaboration

Innovation-active businesses are consistently more likely to report increased employment, productivity and sales, compared to businesses that do not innovate. This is even more pronounced for innovation-active businesses that undertake collaboration compared to those that do not. The evidence is less clear about differences in the scope of collaboration in terms of collaboration partners. It appears that once businesses collaborate outside their own sector they gain advantages, irrespective of whether their collaboration partners were from multiple other sectors or just one. Innovation-active businesses that collaborate internationally do, however, tend to report better outcomes more often than other collaborators but the difference is only marginal and may not be statistically significant.32

Figure 1.3.3: Employment, productivity and sales outcomes, by innovation status and collaboration, per cent, latest 2016–17

32 Customised ABS data commissioned by the Department of Industry, Innovation and Science (https://www.abs.gov.au/websitedbs/D3310114.nsf/Home/2016%20Customised%20Data%20Services)

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1.4 International Comparison

1.4.1 Global Innovation Index

The Global Innovation Index (GII) is a high-profile international index summarising factors affecting innovation outcomes and is often cited in cross-country comparisons. The GII score on which countries are ranked combines seven pillars. Each pillar is a combination of three sub-pillars which are a weighted average of different indicators. Australia ranked 22nd out of 129 countries on the GII in 201933 and as such is classified to be among the innovating leaders — countries with mature innovation systems that perform well on innovation relative to GDP. The GII and other summary indices should be interpreted with caution, due to inherent limitations including the absence of a theoretical foundation to guide the selection of indicators, the use of outdated and missing data values and low sampling for surveys that provide qualitative data. These limitations may impact Australia's results including a downward trend for knowledge and technology outputs (as primary commodities dominate Australian exports) and upwards in creative outputs (as Australia is an English-speaking nation with a relatively small population).

Figure 1.4.1: Global Innovation Index, top 30 countries, index points, latest 2019

33 Cornell University, INSEAD, and WIPO (2019) The Global Innovation Index 2019: Creating Healthy Lives-The Future of Medical Innovation (https://www.globalinnovationindex.org/analysis-indicator)

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1.4.2 Global Innovation Index, Innovation input sub-index

The GII innovation input sub-index comprises five pillars that capture elements of the national economy generally regarded as innovation enablers — such as institutions, infrastructure, or human capital and research. Australia has ranked well on the GII innovation input sub-index since 2011, moving between 10th and 15th among 126 to 143 countries, depending on the year. In 2019, Australia ranked 15th out of 129 countries and was above the OECD+ average. Australia was strongest in the market sophistication (8th) and human capital and research pillars (10th).34

Figure 1.4.2: Global Innovation Index, Innovation input sub-index, top 30 countries, index points, latest 2019

34 Cornell University, INSEAD, and WIPO (2019) The Global Innovation Index 2019: Creating Healthy Lives-The Future of Medical Innovation (https://www.globalinnovationindex.org/analysis-indicator)

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1.4.3 Global Innovation Index, Innovation output sub-index

The GII innovation output sub-index provides information about outputs that are the result of innovative activities occurring in the economy. It comprises two output pillars, namely knowledge and technology and creative, both of which are weighted by GDP. In 2019, Australia ranked 31 out of 129 countries. This is relatively low compared to Australia's GII innovation input ranking of 15 out of 129 countries.35 In line with the focus of the GII report on energy and the potential opportunities for disruptive energy storage technologies, Australia may see an improvement in its GII innovation output sub-index ranking in the future.

Figure 1.4.3: Global Innovation Index, Innovation output sub-index, top 30 countries, index points, latest 2019

35 Cornell University, INSEAD, and WIPO (2019) The Global Innovation Index 2019: Creating Healthy Lives-The Future of Medical Innovation (https://www.globalinnovationindex.org/analysis-indicator)

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1.4.4 Innovation-active businesses that are R&D active

All businesses engaged in R&D are innovation active but not all innovation-active businesses engage in R&D. R&D is a specific type of innovation activity and it can be costly, requiring specialised expertise and equipment. In the business enterprise sector, R&D activity is industry-specific - important to some industries (e.g. Manufacturing) but not to others (e.g. Accommodation and food). The overlap between innovation and R&D activity provides a proxy measure of the extent to which high-value technological innovation may be occurring. Australia has a relatively low proportion of businesses in this category compared to other OECD countries (24.1 per cent in 2016–17 compared to 47.2 per cent for the latest available OECD average, respectively).36 The data only capture businesses pursuing product and/or process innovation, so the estimates partly reflect Australia's service-oriented industry structure and the diminishing share of manufacturing in output and employment. Large businesses had the lowest share of R&D expenditure in 2016–17 (21.9 per cent) and Manufacturing businesses continue to have the highest (26.1 per cent in 2016–17).37

Figure 1.4.4: Innovation-active businesses that are R&D active, only relates to product and/or process innovation, by category, OECD countries, per cent, latest 2019

36 ABS, Research and Experimental Development, Businesses, Australia, Cat. No. 8104.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8104.0)

37 OECD (2019) Innovation indicators, OECD Publishing (http://www.oecd.org/innovation/inno/inno-stats.htm)

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2 EntrepreneurshipThe content of this chapter draws on data collected and published prior to the COVID-19 outbreak. Until new data becomes available, the COVID-19 page provides some key estimates and information related to the impact of COVID-19 on business activity.

Entrepreneurship is an essential part of business dynamism in market economies. It provides a mechanism for economic renewal through the recycling of talent, capital and other resources displaced by competition and technological progress. The picture of Australia's entrepreneurial activity is mixed. Some evidence suggests that Australia's entrepreneurial landscape may have become less dynamic and more hazardous over the years 2002 to 2015. Relatively fewer entrepreneurs were found to be entering the market, and those that entered were more likely to exit than their counterparts that entered in earlier years. Yet, despite fewer businesses entering, the average number of jobs created per entrepreneur has been steady and even increasing over the most recent years.38

Some short-term indicators of Australia's entrepreneurial activity have defied the deterioration in business conditions, including the most recent data on the number of people starting a business, perceptions of business opportunity, and job creation expected from new business ventures. The data show increases in the number of businesses entering the market lifting the number of businesses in operation and the proportion of businesses surviving. There is also tentative evidence of short-term improvement in business growth by employment size, with relatively large increases in the number of micro businesses moving to the small business category, and the number of small businesses moving to the medium-size category.

Only a small fraction of Australian startups drive the majority of net job creation — a pattern that is consistent across OECD economies. These high growth startups show superior sales and profit performance but lower labour productivity, compared to other surviving startups.39 One factor potentially preventing entrepreneurship is a fear of failure, which is more commonly cited in surveys by Australians than their OECD counterparts. Another factor is access to capital, often identified as one of the main hurdles to innovation and business growth, and evidence suggests that Australia's early-stage venture capital investments are lower than most other OECD countries.40

38 Bakhtiari S (2017) Entrepreneurship Dynamics in Australia: Lessons from Micro-data, Department of Industry, Innovation and Science, Office of the Chief Economist research paper 4/2015 (https://www.industry.gov.au/sites/default/files/May%202018/document/pdf/entrepreneurship_dynamics_in_australia_-_lessons_from_micro-data.pdf)

39 Hendrickson L, Bucifal S, Balaguer A and Hansell D (2015) The employment dynamics of Australian entrepreneurship, Department of Industry, Innovation and Science & Australian Bureau of Statistics, Office of the Chief Economist research paper 4/2015 (https://www.industry.gov.au/sites/default/files/June%202018/document/pdf/the_employment_dynamics_of_australian_entrepreneurship.pdf)

40 Alinejad M, Balaguer A and Hendrickson L (2015) Financing innovative entrepreneurship, Department of Industry, Innovation and Science, Office of the Chief Economist research paper 8/2015 (https://www.industry.gov.au/sites/default/files/June%202018/document/pdf/financing_innovative_entrepreneurship.pdf)

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2.1 Business Demography

2.1.1 Businesses in operation by industry

The number of businesses operating in a given industry gives an indication of the market structure and level of competition, which in turn determines how businesses might innovate. At the end of June 2019, there were 2,375,753 actively trading businesses in Australia. This represents an increase of 2.7 per cent from 2,313,291 businesses at the end June 2018. The Transport, postal and warehousing industry grew by 7.7 per cent, whilst the Agriculture, forestry and fishing industry declined by 0.9 per cent. All other industries reported single digit growth. As at 30 June 2019, the highest number of businesses were in Construction (394,575 businesses or 16.6 per cent of total) and in Professional, scientific and technical services (294,471 businesses or 12.4 per cent of total).41

Figure 2.1.1: Businesses in operation, by industry, number, latest 2018–19

41 ABS, Counts of Australian Businesses, including Entries and Exits, Cat. No. 8165.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8165.0)

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2.1.2 Business entries and exits by industry

Business entries and exits reflect business dynamism, and may be used as proxy indicators for the prevailing conditions for entrepreneurial activity. During 2018–19, the number of new Australian business entries was 355,722 — a very small increase (1,202 businesses) from 2017–18 (354,520 businesses). The number of business exits in 2018–19 was 293,260 — an increase of 4.9 per cent (13,632 businesses) from 2017–18 (279,528 businesses). Industries with the highest number entries in 2018–19 include Construction (63,617 businesses), Transport, Postal and Warehousing (47,974 businesses) and Professional, Scientific and Technical Services (47,156 businesses). The Transport, Postal and Warehousing industry has seen the most dramatic growth in business entries over the last four years, rising by 18.9 per cent in 2015–16, 26.8 per cent in 2016–17, 33.5 per cent in 2017–18 and 27.2 per cent in 2018–19. The industry average rate of exits for 2018–19 was 12.7 per cent, an increase of 0.2 per cent from 2017–18.42

Figure 2.1.2: Business entries and exits, by industry, number, latest 2018–19

42 ABS, Counts of Australian Businesses, including Entries and Exits, Cat. No. 8165.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8165.0)

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2.1.3 Survival of business entries by industry

The aggregate rate of business survival, while determined by many factors, provides a simple summary measure of the likelihood of entrepreneurial success. Of the 310,435 businesses that entered during 2015–16, some 78.1 per cent (242,540 businesses) survived to June 2017, and 62.8 per cent (194,946 businesses) were still operating two years later in June 2018. The proportion of this cohort that survived the three years to June 2019 was 53.6 per cent (166,405 businesses). Within this cohort, businesses in the Financial and Insurance Services industry had the highest survival rate (65.2 per cent) at the end of 2018–19, followed by those in Health Care and Social Assistance (64.4 per cent), whilst businesses in the Public Administration and Safety industry had the lowest survival rate (43.3 per cent). (Note: The totals shown in the chart exclude businesses where the industry is not yet known, and thus are different from the totals published by the ABS and referred to above).43

Figure 2.1.3: Survival of business entries, by industry, number, latest 2018–19

43 ABS, Counts of Australian Businesses, including Entries and Exits, Cat. No. 8165.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8165.0)

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2.1.4 Churn rate by industry

The industry churn rate is the sum of the birth and death rates of businesses in the industry per financial year. This captures the creation of new businesses and the creative destruction of established businesses. New businesses are fundamental in delivering innovation to market.44 The annual churn rate across All industries rose from 26.3 per cent in 2013–14 to 28.1 per cent in 2018–19. While individual industries have different churn rates, most industry churn rates have changed very little over time. The only industry to show significant change is Transport, postal and warehousing, which rose from 28.2 per cent in 2013–14 to 46.7 per cent in 2018–19.45 The significant rise is partially the result of changes to the Victorian taxi market in 2016 that dramatically reduced the cost of purchasing a taxi or hire car license.46 The strong residential property market has also allowed new businesses to enter the removalists industry.47

Figure 2.1.4: Industry churn rate, by selected industries, per cent, latest 2018–19

44 Economics Innovation Group, Dynamism in Retreat: Consequences for Regions, Markets and Workers, February 2017 (https://eig.org/wp-content/uploads/2017/07/Dynamism-in-Retreat-A.pdf)

45 ABS, Counts of Australian Businesses, including Entries and Exits, Cat. No. 8165.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8165.0)

46 IBISWorld, Taxi and Limousine Transport in Australia, Industry Performance (https://my.ibisworld.com/au/en/industry/i4626/industry-performance)

47 IBISWorld, Removalists in Australia, Industry Performance (https://my.ibisworld.com/au/en/industry/i4611/industry-performance)

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2.2 Startup Finance

2.2.1 Value of venture capital investments

Venture capital (VC) plays an important role in financing the launch, early development and expansion of innovative, high-growth-potential companies. These companies may have difficulties accessing traditional sources of capital due to their higher risk profile. In any given year, roughly a quarter of young innovative Australian small and medium enterprises (SMEs) seek some form of external finance. Evidence suggests that the success rate of businesses applying for venture capital investment fell from 3 per cent in 2005–06 to just over 1 per cent in 2013–14.48 The dollar value of venture capital investment has followed a similar pattern. It peaked in 2007–08 with a total of $901 million invested but subsequently declined to just $266 million in 2012–13. The main contributor to this decline was early expansion funding, which is the largest and most volatile of the three investment types. More recently, Australia's venture capital investment has been trending back up, reaching $701 million in 2018–19, with around 21 per cent of this going to startups.49

Figure 2.2.1: Value of venture capital investments, by type, $ million, latest 2018–19

48 Alinejad M, Balaguer A and Hendrickson L (2015) Financing innovative entrepreneurship, Department of Industry, Innovation and Science, Office of the Chief Economist research paper 8/2015 (https://www.industry.gov.au/sites/default/files/June%202018/document/pdf/financing_innovative_entrepreneurship.pdf)

49 ABS, Venture Capital and Later Stage Private Equity, Australia, Cat. No. 5678.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/5678.0)

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2.2.2 Venture capital investment deals

Surveys in Australia and across the OECD suggest that obtaining adequate access to capital is one of the biggest hurdles to growing innovative businesses. In 2016–17, nearly one in three innovation-active Australian businesses reported the lack of access to funds as a barrier to innovation.50 Government policy aims to attract more venture capital investment by reducing the associated risks and addressing any information asymmetries, making it easier for investors to find potential matching opportunities.51 Venture capital is defined as high risk private equity capital for typically new, innovative or fast growing unlisted companies in the pre-seed, seed, start-up or early expansion stage. During the period from 2007–08 to 2012–13, the total number of venture capital deals declined before rising again strongly in more recent years. Since its lowest point of 49 deals in 2012–13, the number of pre-seed and seed funding deals increased more than three-fold to 166 deals in 2017–18 before falling to 125 deals in 2018–19. Over the same period, the number of early expansion deals nearly tripled from 65 in 2012–13 to 172 in 2018–19, and the number of start-up funding deals nearly doubled from 59 in 2012–13 to 114 in 2018–19.52

Figure 2.2.2: Venture capital investment deals, by type, number, latest 2018–19

50 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/ausstats/[email protected]/mf/8158.0)

51 Australian Government (2018) Venture Capital, Department of Industry, Innovation and Science (https://www.business.gov.au/Grants-and-Programs/Venture-Capital)

52 ABS, Venture Capital and Later Stage Private Equity, Australia, Cat. No. 5678.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/5678.0)

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2.3 Business Growth

2.3.1 High-growth firms measured by turnover

Evidence suggests that business growth is associated with certain types of innovation.53 However, exceptional growth is not some innate business characteristic, but rather a phase that some businesses go through during their life cycle. Between 2008 and 2012, Australia's proportion of high-growth firms (HGFs) as measured by turnover was consistently above the median for all countries for which data are available. This was despite the decline of Australia's HGF proportion since 2008. However, by 2013 the all-country median had lifted dramatically to reach 10.5 per cent, while Australia's HGF proportion continued its decline to 9.3 per cent in 2012–13. The most recent available estimate of Australia's proportion of HGFs is 9.6 per cent for 2016–17, whilst the all-country median has now reached 19.6 per cent for 2017. Further investigation may be warranted into the underlying drivers of these trends.5455

Figure 2.3.1: High-growth firms measured by turnover, share of all businesses, OECD countries, per cent, latest 2017

53 Department of Industry, Innovation and Science (2017) Australian Innovation System Report 2017, Office of the Chief Economist (https://publications.industry.gov.au/publications/australianinnovationsystemreport2017/index.html)

54 OECD (2017) Entrepreneurship at a Glance 2017, OECD Publishing (https://www.oecd-ilibrary.org/industry-and-services/entrepreneurship-at-a-glance_22266941)

55 Customised ABS data commissioned by the Department of Industry, Innovation and Science (https://www.abs.gov.au/websitedbs/D3310114.nsf/Home/2016%20Customised%20Data%20Services)

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2.3.2 High-growth firms measured by employment

Australian HGFs make a disproportionate economic contribution compared to other businesses. Between 2004–05 and 2011–12, businesses with high-growth in employment represented only 9 per cent of all businesses with five or more employees but they contributed around 46 per cent of net positive employment growth. This means that the effect of job gains outweighed job losses. Further, 23.5 per cent of net positive employment growth came from large HGFs (as measured by employment), which represented only 0.4 per cent of businesses. HGFs are difficult to identify, largely because of their lack of growth persistence and difficulties in predicting which businesses will grow.56 Since 2007–08, Australia's proportion of HGFs as measured by employment has steadily fallen from 7.2 per cent to 5.2 per cent in 2016–17.57

Figure 2.3.2: High-growth firms measured by employment, share of all businesses, Australia, per cent, latest 2016–17

56 Department of Industry, Innovation and Science (2017) Australian Innovation System Report 2017, Office of the Chief Economist (https://publications.industry.gov.au/publications/australianinnovationsystemreport2017/index.html)

57 Customised ABS data commissioned by the Department of Industry, Innovation and Science (https://www.abs.gov.au/websitedbs/D3310114.nsf/Home/2016%20Customised%20Data%20Services)

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2.3.3 Businesses changing turnover range

Business-growth patterns can be illustrated by the number of businesses moving from smaller turnover ranges to larger ones over a given period. Of the 682,124 businesses that started with an annual turnover in the range $50k to less than $200k in the year to June 2018, some 93,029 businesses (13.6 per cent) increased their revenue to a higher range in the following year. Of these, 293 businesses moved into the $5m to less than $10m range and a further 264 businesses increased their annual turnover to $10m or more.58 All of these 93,029 businesses could potentially meet the OECD definition of a high-growth enterprise — if they remain in their higher turnover range for another two years.59

Figure 2.3.3: Businesses changing turnover range, as at June, number, latest 2018–19

58 ABS, Counts of Australian Businesses, including Entries and Exits, Cat. No. 8165.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8165.0)

59 Audretsch D B (2012) Determinants of High-Growth Entrepreneurship, OECD and Danish Business Authority (https://www.oecd.org/cfe/leed/Audretsch_determinants%20of%20high-growth%20firms.pdf)

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2.3.4 Businesses changing employment range

Business-growth patterns can be illustrated by the number of businesses moving from smaller employment ranges to larger ones over a given period. Of the 554,006 businesses identified as micro businesses (1–4 employees) at June 2018, some 37,250 grew to become small businesses (5–19 employees) by June 2019. A further 1,470 grew to become medium-sized businesses (20–199 employees) and 48 businesses recorded truly exceptional growth by becoming large businesses (200+ employees).60 A total of 38,768 micro-businesses — 7 per cent of all employing micro businesses — increased their employment range during the year. All of these businesses could potentially meet the OECD definition of a high-growth enterprise — if they remain in their new size range for another two years.61

Figure 2.3.4: Businesses changing employment range, as at June, number, latest 2018–19

60 ABS, Counts of Australian Businesses, including Entries and Exits, Cat. No. 8165.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8165.0)

61 Audretsch D B (2012) Determinants of High-Growth Entrepreneurship, OECD and Danish Business Authority (https://www.oecd.org/cfe/leed/Audretsch_determinants%20of%20high-growth%20firms.pdf)

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2.4 International Comparison

2.4.1 Total early-stage entrepreneurial activity (TEA)

The latest Global Entrepreneurship Monitor (GEM) data paints a relatively positive picture of entrepreneurial activity in Australia. The headline indicator — TEA — estimates the share of working-age adults who are in the process of starting a business (i.e. nascent entrepreneurs) or who started a new business as owner-manager less than 42 months before the GEM survey was conducted. In 2019, around 10.5 per cent of Australia's adult population were early-stage entrepreneurs — a continuing decline from 14.6 per cent in 2016. The survey results would imply that the number of Australian adults who were either a nascent entrepreneur or the owner-manager of a new business contracted from 2.2 million in 2016 to 1.7 million in 2019. Australia performed slightly below average in terms of the TEA rate among the 25 OECD economies (11.4 per cent). Australia's performance on this metric was above the UK (8.4 per cent), but trailed the United States (17.4 per cent) and Canada (18.2 per cent) in 2018 by a considerable margin. Chile's TEA rate has grown from 25.1 per cent in 2018 to 36.7 per cent in 2019.62

Figure 2.4.1: Total early-stage entrepreneurial activity (TEA), share of adults as nascent entrepreneur or owner of a new business, OECD countries, per cent, latest 2019

62 GEM Consortium (2020) Global Entrepreneurship Monitor 2019/20 Global Report, Global Entrepreneurship Research Association (https://www.gemconsortium.org/report)

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2.4.2 Innovative early-stage entrepreneurial activity

In addition to the headline total early-stage entrepreneurial activity (TEA) metric, the Global Entrepreneurship Monitor publishes information on the fraction of new businesses that offer new or improved products or services to the market. This indicator estimates the extent to which entrepreneurs are introducing products that are new to some or all customers, and that are offered by few or no competitors. In 2017, some 28.5 per cent of Australian adults involved in TEA (more than 513,000 entrepreneurs) indicated that their products or services were innovative. This compares to the OECD average of 31.5 per cent in 2017 and 30.5 per cent in 2018. Australia's estimates lag behind the United States and Canada, which have comparatively higher rates of innovative startups of 35.9 per cent and 43.2 per cent, respectively.63

Figure 2.4.2: Early-stage entrepreneurial activity, share of new businesses with new innovative products or services, OECD countries, per cent, latest 2018

63 GEM Consortium (2018) Global Entrepreneurship Monitor 2017/18 Global Report, Global Entrepreneurship Research Association (https://www.gemconsortium.org/report)

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2.4.3 Adults perceiving start-up opportunities for new businesses

Perceptions of the abundance and quality of business opportunities play an important role in deciding whether to be entrepreneurially active. In Australia, the share of adults who saw good opportunities to start a business in the area where they lived fell from 51.4 per cent in 2017 to 45.7 per cent in 2019, while the OECD average increased from 44.5 per cent to 52.6 per cent in the same period. Canada and the United States are significantly above the OECD average at 67.1 per cent and 67.2 per cent, respectively.64 The 2017–18 GEM Australian national report also suggests that in 2017 the share of opportunity-driven Australian entrepreneurs was almost four times higher in that year than the share of entrepreneurs that started a business out of necessity (83.2 per cent and 16.8 per cent, respectively). Similarly, Australia performed relatively well on the metric showing the extent to which new businesses are likely to create jobs. Around 28.2 per cent of new Australian businesses expect to create at least six new jobs in the next five years, performing well above the OECD average (20.6 per cent).65

Figure 2.4.3: Early-stage entrepreneurial activity, share of adults perceiving start-up opportunities, OECD countries, per cent, latest 2019

64 GEM Consortium (2020) Global Entrepreneurship Monitor 2019/20 Global Report, Global Entrepreneurship Research Association (https://www.gemconsortium.org/report)

65 Entrepreneurship, Commercialisation and Innovation Centre (2019) Global Entrepreneurship Monitor 2017/18 Australian National Report, The University of Adelaide (https://eprints.qut.edu.au/127058/1/GEM%20AUS%20Report%20CLIENT%20corrected.pdf)

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2.4.4 Adults prevented from starting a business by fear of failure

Despite the numerous positive features of Australia's entrepreneurship profile, the Global Entrepreneurship Monitor highlights some areas of concern. Reported fear of failure is at its highest level in Australia at 47.4 per cent in 2019 since the metric was first measured, well above the OECD average of 40.4 per cent. This metric measures the apprehension preventing prospective entrepreneurs from starting a business despite perceiving good opportunities to do so. Australia's reported fear of failure is well above countries such as Germany (29.7 per cent) and the United States (35.1 per cent). Chile reported the highest fear of failure (58.1 per cent), although they, like Australia, saw good opportunities to start a business.66

Figure 2.4.4: Early-stage entrepreneurial activity, share of adults prevented from starting a business by fear of failure, OECD countries, per cent, latest 2019

66 GEM Consortium (2018) Global Entrepreneurship Monitor 2017/18 Global Report, Global Entrepreneurship Research Association (https://www.gemconsortium.org/report)

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3 Science and ResearchThe content of this chapter draws on data collected and published prior to the COVID-19 outbreak. Until new data becomes available, the COVID-19 page provides some key estimates and information related to the impact of COVID-19 on business activity.

Science and research are major driving forces behind knowledge creation, and play a crucial role in the technological development and competitiveness of an economy. In addition to creating new knowledge, research activity is an important driver of skill development. Research is becoming increasingly data-intensive and multi-disciplinary. For example, the Square Kilometre Array radio telescope research facility will generate huge amounts of scientific data that was previously unavailable. This data can feed into future discoveries that may not yet be conceived, potentially finding new commercial applications either through the incremental improvement of existing services or even by creating entirely new technologies, products and industries.67

There is robust and consistent evidence of significant positive spillovers from R&D activity, with some industries generating more spillovers than others.68 R&D activity has been estimated to explain up to 75 per cent of total factor productivity growth, once externalities are considered. R&D also has high rates of return, estimated at 10–30 per cent for private return and more than 40 per cent for social return.69 Recent Australian evidence also suggests that an increase in business expenditure on own R&D stock is associated with a significantly larger increase in sales for the average business, and that R&D performed in one business can increase the sales of other businesses nearby.70

However, aggregate expenditure on R&D in Australia is falling. Total expenditure on R&D across all sectors (or GERD) has declined in both dollar terms and as a proportion of GDP in recent years. The decline has been driven largely by falls in business expenditure on R&D in the mining and manufacturing industries. Public investment in R&D has followed a long-term upward trend but remained relatively flat in recent years. Compared to the 1980s, there is now considerably more emphasis on indirect R&D tax measures than direct and targeted funding. In terms of research output, Australia's share of the world's scientific publications has been growing steadily, and its share of the top percentiles of highly cited publications reflects the quality of Australia's science and research output.

67 Department of Industry, Innovation and Science (2018) Co-hosting the Square Kilometre Array, Project (https://www.industry.gov.au/strategies-for-the-future/astronomy/co-hosting-the-square-kilometre-array)

68 Balaguer A, Talgaswatta T, Palangkaraya A and Webster B (2018) Evidence of R&D spillovers in Australian business, Department of Industry, Innovation and Science and Swinburne University Centre for Transformative Innovation (forthcoming) (https://www.industry.gov.au/data-and-publications/staff-research-papers)

69 Department of Industry, Innovation and Science (2016) Australian Innovation System Report 2016, Office of the Chief Economist (https://www.industry.gov.au/data-and-publications/australian-innovation-system-report/australian-innovation-system-report-2016)

70 Bakhtiari S and Breunig R (2017) The role of spillovers in research and development expenditure in Australian industries, Department of Industry, Innovation and Science, Office of the Chief Economist research paper 2/2017 (https://www.industry.gov.au/data-and-publications/staff-research-papers/the-role-of-spillovers-in-research-and-development-expenditure-in-australian-industries)

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3.1 Business R&D

3.1.1 Total business expenditure on R&D (BERD)

As experimental development is dedicated to producing new materials, technologies, products or processes, it is closely related to business innovation. It has previously been estimated that R&D-active Australian businesses were three times more likely to introduce new-to-market goods and service innovations than non-R&D-active ones.71 BERD currently makes up just over half (52.7 per cent) of total Gross expenditure on R&D (GERD). It is particularly relevant to businesses in technology-intensive industries such as Manufacturing but also increasingly in Professional, scientific and technical services, which now represents the largest contribution to BERD. Following a notable decline in 2015–16, total BERD lifted from $16.7 billion in 2015–16 to $17.4 billion in 2017–18. The largest increase in this period occurred in overseas expenditures (up $534 million), while in Western Australia expenditures continued to fall sharply (down $490 million). In 2017–18 by field of research, the largest contribution to BERD came from Information and computing sciences ($6.7 billion) and Engineering came in second ($4.7 billion).72

Figure 3.1.1: Business expenditure on R&D (BERD), $ billion, latest 2017–18

71 Department of Industry, Innovation and Science (2016) Australian Innovation System Report 2016, Office of the Chief Economist (https://www.industry.gov.au/data-and-publications/australian-innovation-system-report/australian-innovation-system-report-2016)

72 ABS, Research and Experimental Development, Businesses, Australia, Cat. No. 8104.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8104.0)

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3.1.2 Business expenditure on R&D (BERD) by industry

Australia's BERD is relatively concentrated, with just four industries accounting for more than three quarters of the $17.4 billion in total expenditure. The largest contribution in 2017–18 was in Professional, scientific and technical services (29.3 per cent), which has overtaken Manufacturing (26.4 per cent) for the first time. This is especially significant given that as recently as 2011–12, Professional, scientific and technical services accounted for 15.5 per cent of total BERD, compared to 24.4 per cent for Manufacturing and 22.4 per cent for Mining. Mining expenditure peaked in 2011–12 (at $4.1 billion) and has fallen to a quarter of that year's value — to $1.0 billion in 2017–18 — contributing a comparatively modest 6.0 per cent to total BERD.73

Figure 3.1.2: Business expenditure on R&D (BERD), top 4 industries, $ billion, latest 2017–18

73 ABS, Research and Experimental Development, Businesses, Australia, Cat. No. 8104.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8104.0)

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3.1.3 Business expenditure on R&D (BERD) as a share of GDP

In many OECD countries, R&D activity in the business enterprise sector represents the largest contribution to overall R&D activity. The ratio of BERD to GDP provides a convenient measure for making cross-country comparisons. It also gives an indication of the trend of a country's business R&D intensity over time. Year-to-year changes in the value of BERD to GDP reflect changes in both BERD as well as GDP, so they should be interpreted with caution. Australia's BERD to GDP declined steadily from 1.37 per cent in 2008–09 to 0.94 per cent in 2017–18. This trend has resulted from a stagnating value of BERD (numerator), measured against a growing value of GDP (denominator). A closer look at the ABS data reveals that the bulk of the stagnation can be traced back to large declines in a handful of industry subdivisions in Mining, and to a lesser extent Manufacturing (data not shown). The pattern is characterised by a significant withdrawal of R&D spending from the field of Engineering, most evidently by large businesses based in Western Australia and Queensland.74

Figure 3.1.3: Business expenditure on R&D (BERD), share of GDP, per cent, latest 2017–18

74 ABS, Research and Experimental Development, Businesses, Australia, Cat. No. 8104.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8104.0)

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3.2 Government R&D

3.2.1 Government expenditure on R&D (GovERD) by type of activity

In addition to providing support for business R&D, governments are major R&D performers through public research agencies, such as the CSIRO. Australian evidence points to significant contributions to productivity from public sector R&D spending.75 Australia's GovERD comprises a mix of research activities including Applied research, Strategic basic research, Experimental development and Pure basic research. During the 12 years to 2018–19, the majority of GovERD by the Commonwealth was directed towards Applied research ($1.17 billion or 55.4 per cent of total in 2018–19). Pure basic research has historically received a relatively modest fraction of total GovERD (around $135 million or 4.1 per cent of total in 2018–19).76

Figure 3.2.1: Government expenditure on R&D (GovERD), by type of activity, $ million, latest 2018–19

75 Elnasri A and Fox K J (2014) The Contribution of Research and Innovation to Productivity and Economic Growth, UNSW Australian School of Business research paper No. 2014–08 (https://www.business.unsw.edu.au/About-Site/Schools-Site/Economics-Site/Documents/The_Contribution_of_Research_and_Innovation_to_Productivity_Kevin_Fox.pdf)

76 ABS, Research and Experimental Development, Government and Private Non-Profit Organisations, Australia, Cat. No. 8109.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8109.0)

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3.2.2 Government expenditure on R&D (GovERD) by location of expenditure

In 2018–19, the Australian Capital Territory (ACT) was the third largest jurisdiction of GovERD by the Commonwealth — both in absolute and relative terms ($331 million and 15.7 per cent of total) — behind Victoria ($544 million or 25.8 per cent of total) and South Australia ($340 million or 16.1 per cent). This pattern of expenditure reflects the significant contribution of the CSIRO, which has its headquarters in the ACT (CSIRO funding is recorded against the ACT, despite having operations nation-wide). Commonwealth GovERD in the ACT peaked in 2011–12 at $492 million (20.3 per cent of total), and has fallen steadily since then. In 2018–19 it fell by $37 million from $367 million in 2016–17, allowing South Australia to overtake it for the first time. The ACT was also the second smallest jurisdiction of GovERD by state or territory (under $8.4 million or 0.7 per cent of total), the smallest being Tasmania ($4.3 million or 0.4 per cent of total). This general pattern has been broadly consistent over the decade to 2018–19.77

Figure 3.2.2: Government expenditure on R&D (GovERD), by level of government, by location of expenditure, $ million, latest 2018–19

77 ABS, Research and Experimental Development, Government and Private Non-Profit Organisations, Australia, Cat. No. 8109.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8109.0)

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3.2.3 Government expenditure on R&D (GovERD) by level of government

Australia's total GovERD comprises expenditure by both the Commonwealth, and states and territories. The share of Commonwealth expenditure currently makes up around two-thirds of total spending, and this has remained fairly stable over the last 12 years for which data are available. GovERD by the Commonwealth peaked in 2011–12 at $2.43 billion before declining to $2.11 billion in 2016–17. GovERD by states and territories peaked at $1.38 billion in 2012–13, trailing the Commonwealth by approximately one year.78

Figure 3.2.3: Government expenditure on R&D (GovERD), by level of government, $ billion, latest 2018–19

78 ABS, Research and Experimental Development, Government and Private Non-Profit Organisations, Australia, Cat. No. 8109.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8109.0)

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3.2.4 Australian Government investment in R&D

Government investment in R&D aims to cover the difference between the economic value of R&D to the community at large and the private returns received by inventors and businesses that incur the costs and risks of undertaking R&D for profit. Governments also support business R&D by offering tax relief for R&D-related activities and by raising awareness of the technological opportunities available to reduce both the cost and uncertainty of research and innovation.79 While remaining flat in recent years, the long-term trend in Australian Government investment in R&D is increasing. Over the two decades, it increased from $3.8 billion in 1998–99 before peaking at $10.3 billion in 2017–18 and is currently estimated to be $9.6 billion in 2019–20. (Note: The 2019–20 data is a budget estimate and will be revised as actual data becomes available.)80

Figure 3.2.4: Australian Government investment in R&D, current prices, $ billion, latest 2019–20

79 Elnasri A and Fox K J (2014) The Contribution of Research and Innovation to Productivity and Economic Growth, UNSW Australian School of Business research paper No. 2014–08 (https://www.business.unsw.edu.au/About-Site/Schools-Site/Economics-Site/Documents/The_Contribution_of_Research_and_Innovation_to_Productivity_Kevin_Fox.pdf)

80 Department of Industry, Innovation and Science, Science Research and Innovation (SRI) Budget Tables (https://www.industry.gov.au/data-and-publications/science-research-and-innovation-sri-budget-tables)

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3.2.5 Australian Government investment in R&D by sector

By economic sector, around 37.5 per cent of Australian Government investment in R&D is directed to higher education research for 2019–20. Roughly one fifth (21.4 per cent) is funding for research in business, and one fifth again (21.8 per cent) is allocated to research activities by the Australian Government and public agencies. Multisector funding makes up around 19.1 per cent, and the residual is funding to the rest of the world. Long-term trends in the composition of Australian Government R&D funding reveal that the share of funding for research activities currently allocated to the Commonwealth agencies sector has fallen from 51.0 per cent of total in 1981–82 to 21.8 per cent in 2019–20. Over the same period, the share of funding for research activities in the Business enterprise sector has multiplied nearly eight fold over the same period (from 2.7 per cent to 21.4 per cent of total) — although this is well below its 2011–12 peak of 33.3 per cent. The share of Higher education funding peaked at 49.4 per cent in 1998–99 before falling back to between 30 and 40 per cent where it has remained broadly the same over the decade. It is currently at 37.5 per cent in 2019–20. (Note: The 2019–20 data is a budget estimate and will be revised as actual data becomes available.)81

Figure 3.2.5: Australian Government investment in R&D, by sector, per cent, latest 2019–20

81 Department of Industry, Innovation and Science, Science Research and Innovation (SRI) Budget Tables (https://www.industry.gov.au/data-and-publications/science-research-and-innovation-sri-budget-tables)

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3.2.6 Australian Government investment in R&D by major programs

Seven programs make up roughly 75 per cent of total Australian Government investment in R&D. The share of funding for the Commonwealth Scientific and Industrial Research Organisation (CSIRO) has declined from 28.8 per cent of total 1981–82 to 8.7 per cent in 2019–20. By contrast, following the introduction of industry R&D tax measures, the share of this group of programs expanded from 9.7 per cent in 1985–86 to a peak of 28.0 per cent in 2017–18. At present, these measures represent the largest component of total Australian Government R&D funding and are estimated to account for 20.9 per cent in 2019–20, followed by Research block grants at 21.1 per cent in the same year. (Note: The 2019–20 data is a budget estimate and will be revised as actual data becomes available. From 2000–01 the Former funding of higher ed. research was replaced by a new funding regime, introducing new key elements such as competitive Research block grants and Australian Research Council (ARC) funding.)82

Figure 3.2.6: Australian Government investment in R&D, by major programmes, per cent, latest 2019–20

82 Department of Industry, Innovation and Science, Science Research and Innovation (SRI) Budget Tables (https://www.industry.gov.au/data-and-publications/science-research-and-innovation-sri-budget-tables)

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3.2.7 Civil government budget allocations for R&D (GBARD) by selected socio-economic objectives

Governments fund a variety of research effort. Consistent with the OECD Frascati Manual definition of R&D, data on GBARD encompass all allocations from sources of government revenue within the budget and are typically timelier than R&D survey data.83 Allocations for R&D with specific socio-economic objectives are measured as a share of total civil GBARD, which exclude the allocation of GBARD on defence R&D. In Australia, the share of civil GBARD allocated to Health and environment programs increased from 18.7 per cent in 2000 to 32.3 per cent in 2019, while the share of General university funds fell from 37.1 per cent to 30.1 per cent in the same period. The share of Economic development programs has remained relatively steady during this period, starting at 28.9 per cent in 2000 and recently easing to 24.4 per cent in 2019. Compared to other OECD countries, Australia allocates a relatively high share of its civil GBARD to these two socio-economic objectives, particularly to Health and environment programs.84

Figure 3.2.7: Civil government budget allocations for R&D (Civil GBARD), by selected socio-economic objectives, OECD countries, per cent, latest 2020

83 OECD (2015) Frascati Manual 2015: Guidelines for Collecting and Reporting Data on Research and Experimental Development, OECD Publishing (http://www.oecd.org/publications/frascati-manual-2015-9789264239012-en.htm)

84 OECD (2020) Main Science and Technology Indicators 2020/1, OECD Publishing (http://www.oecd.org/sti/msti.htm)

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3.3 Higher Education R&D

3.3.1 Higher education resources devoted to R&D (HERD) by type of activity

Total HERD, that is spending on R&D performed by Australian higher education organisations, contributed about 34 per cent to Australia's total spending on R&D in 2017–18.85 As a share of GDP it remained stable at 0.62 per cent over the two year period from 2016 to 2018 (data not shown). Applied research, the largest category within HERD, relates to original investigation undertaken in order to acquire new knowledge. It is directed primarily towards a specific practical aim or objective, rather than purely the acquisition of new knowledge which is the goal of basic research.86 In 2018, nearly half of the research activity in the higher education sector was Applied research ($5.9 billion or 48 per cent of total HERD). Its share, as well as its dollar value, has increased steadily since 1992 when it was only $514 million or 30 per cent of total HERD. By contrast, Pure basic research recorded $676 million in 1992 and grew to only $2.8 billion in 2018. Its share of total research activity has declined from 34 per cent to 23 per cent over this time period.87

Figure 3.3.1: Higher education resources devoted to R&D (HERD), by type of activity, $ billion, latest 2018

85 ABS (2019) Research and Experimental Development, Businesses, Australia, 2017–18, Cat. No. 8104.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8104.0/)

86 OECD (2015) Frascati Manual 2015: Guidelines for Collecting and Reporting Data on Research and Experimental Development, OECD Publishing (http://www.oecd.org/publications/frascati-manual-2015-9789264239012-en.htm)

87 ABS, Research and Experimental Development, Higher Education Organisations, Australia, Cat. No. 8111.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8111.0)

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3.3.2 Higher education resources devoted to R&D (HERD) by location

Roughly 60 per cent of total HERD is located in just two states — New South Wales and Victoria — and this geographical concentration has increased over the last two decades. Victoria has increased its share by 5.6 percentage points to 28.2 per cent in 2018 and New South Wales increased its share by 1.8 percentage points to 30.9 per cent. Conversely, the Australian Capital Territory has almost halved its share of total HERD from 11.0 per cent in 2000 to 6.1 per cent in 2018.88

Figure 3.3.2: Higher education resources devoted to R&D (HERD), by location, per cent, latest 2018

88 ABS, Research and Experimental Development, Higher Education Organisations, Australia, Cat. No. 8111.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8111.0)

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3.3.3 Higher education resources devoted to R&D (HERD) by source of funds

There has been a sustained growth in total HERD over the last two decades. Total HERD was nearly $12.2 billion in 2018 with a significant contribution coming from General university funds. Over the last 20 years, this source has increased from $1.8 billion in 2000 to $6.8 billion in 2018, but as a share of total HERD this funding source has decreased from 63 per cent in 2000 to 56 per cent in 2018. Much of this contraction is due to increased Other Commonwealth government funding from just under 6 per cent in 2000 to over 15 per cent in 2018. It is now the second largest source of funds.89

Figure 3.3.3: Higher education resources devoted to R&D (HERD), by source of funds, $ billion, latest 2018

89 ABS, Research and Experimental Development, Higher Education Organisations, Australia, Cat. No. 8111.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8111.0)

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3.4 Research Output

3.4.1 Share of world scientific publications

Australia has a considerably higher share of highly-cited publications than its share of world population, suggesting that the quality of Australia's scientific publications is well above the world average. Australia's share of the world's scientific publications has been growing steadily, rising from 3.6 per cent in 2011 to 4.2 per cent in 2019, which is an order of magnitude higher than Australia's 0.3 per cent share of world population.90 While the United States still contributes over a quarter of the world's publications, its share has gradually diminished over time, primarily due to China's increased contribution. China's share of the world's scientific publications has more than doubled since 2011, reaching 24.9 per cent in 2019.91

Figure 3.4.1: Scientific publications, share of world, top 20 countries, per cent, latest 2019

90 World Bank (2020) World Development Indicators, The World Bank Group (http://datatopics.worldbank.org/world-development-indicators/)

91 Clarivate Analytics (2020) Incites, Web of Science Group (https://clarivate.com/webofsciencegroup/solutions/incites/)

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3.4.2 Australian research fields with higher-than-world-average citation rates

Research is becoming increasingly data-intensive and multidisciplinary. The 2018 OECD Science, Technology and Innovation Outlook report suggests that materials research, for example, increasingly incorporate disciplines beyond traditional science and engineering or physics — such as chemical engineering, bio-engineering, applied mathematics, computer science and mechanical engineering. Moreover, new possibilities for handling data have made them core inputs to research and innovation across all sectors.92 Australian research excellence has steadily increased over the last 30 years and is now spread across the whole breadth of the Essential Science Indicators.93 These indicators, based on publication and citation performance, cover 22 broad research fields and provide an analytical tool to help identify top-performing research. Since 2013, Australia has achieved higher-than-world-average citation rates in each of these research fields.94

Figure 3.4.2: Australian research fields with higher-than-world-average citation rates, out of 22 fields, number, latest 2019

92 OECD (2018) OECD Science, Technology and Innovation Outlook 2018: Adapting to Technological and Societal Disruption, OECD Publishing (http://www.oecd.org/sti/oecd-science-technology-and-innovation-outlook-25186167.htm)

93 Clarivate Analytics (2020) Essential Science Indicators, Web of Science Group (https://clarivate.com/webofsciencegroup/solutions/essential-science-indicators/)

94 Clarivate Analytics (2020) Incites, Web of Science Group (https://clarivate.com/webofsciencegroup/solutions/incites/)

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3.4.3 Scientific publications per $ million non-business R&D

Research efficiency can be measured in terms of the number of scientific publications per $ million invested in non-business R&D. Australia's performance on this metric has lifted from 4.9 publications per $ million non-business R&D in 2006 (below the corresponding OECD average of 5.3) to 6.9 publications per $ million non-business R&D in 2015 (well above the corresponding OECD average of 5.9). This indicates that Australia's researchers have become more productive at generating scientific publications per dollar invested and clearly highlights improvements in relation to the OECD average. This suggests that Australia's research efficiency has notably improved over the period.95

Figure 3.4.3: Scientific publications per $ million non-business R&D, OECD countries, number, latest 2016

95 Clarivate Analytics (2020) Incites, Web of Science Group (https://clarivate.com/webofsciencegroup/solutions/incites/)

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3.4.4 Scientific publications per million population

Research efficiency can be measured not only by the research output per dollar invested but also by the research output relative to the general population. Australia's scientific research activities draw on talent from a relatively small but well-educated population. In 2017, Australia contributed to around 3,047 publications per million population, well above the OECD average of 1,871. It ranks 6th in the OECD for this measure. Switzerland, Iceland and Denmark are the three top ranking countries.96

Figure 3.4.4: Scientific publications per million population, OECD countries, number, latest 2017

96 Clarivate Analytics (2020) Incites, Web of Science Group (https://clarivate.com/webofsciencegroup/solutions/incites/)

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3.4.5 Share of top one and top ten per cent highly-cited publications

Australia's share of both top 1 per cent and top 10 per cent highly-cited publications has risen sharply since 2005. In 2019, Australian authors were credited in 8.2 per cent of the world's top 1 per cent highly cited publications and in 6.2 per cent of the world's top 10 per cent highly cited publications for all disciplines. Further, while rates of international collaboration have risen around the world, Australia has experienced a greater increase in its publication citations involving international collaboration compared to the OECD average.97

Figure 3.4.5: Scientific publications, share of highly-cited publications, Australia and OECD average, per cent, latest 2019

97 Clarivate Analytics (2020) Incites, Web of Science Group (https://clarivate.com/webofsciencegroup/solutions/incites/)

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3.5 International Comparison

3.5.1 Gross expenditure on R&D (GERD) as a share of GDP

Gross expenditure on R&D (GERD) is a key headline measure of a country's aggregate R&D activity. It is the sum of expenditures on R&D across all sectors of the economy, namely the business, government, higher education and private non-profit sectors. Australia's latest GERD estimate published by the ABS is $33.1 billion in 2017–18, which represents an increase of around 6.0 per cent from $31.2 billion in 2015–16.98 However, Australia's national R&D intensity (GERD as a share of GDP) decreased from 1.88 per cent in 2015–16 to 1.79 per cent in 2017–18, remaining below the OECD average of 2.34 per cent in 2017. In the same period, Israel and South Korea had the highest national R&D intensities, 4.82 per cent and 4.29 per cent, respectively. National R&D intensity in Australia peaked at 2.25 per cent of GDP in 2008–09 and has been declining ever since.99

Figure 3.5.1: Gross expenditure on R&D (GERD), share of GDP, OECD countries, per cent, latest 2019

98 ABS, Research and Experimental Development, Businesses, Australia, Cat. No. 8104.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8104.0)

99 OECD (2020) Main Science and Technology Indicators 2020/1, OECD Publishing (http://www.oecd.org/sti/msti.htm)

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3.5.2 Gross expenditure on R&D (GERD) as a share of GDP by sector

GERD is the aggregate expenditure devoted to R&D by the business, government, higher education and private non-profit sectors. The largest component is business expenditure on R&D (BERD) and its stagnation in recent years has been a major factor driving the decline in Australia's GERD as a proportion of GDP (or national R&D intensity). The latest BERD to GDP estimate is 0.94 per cent in 2017–18, which represents a continuing decline from 1.18 per cent in 2013–14 and 1.00 per cent in 2015–16. Government expenditure on R&D as a share of GDP (GovERD to GDP) has also been declining but not nearly to the same extent, with latest estimate at 0.17 per cent in 2018–19. Meanwhile, higher education expenditures on R&D as a share of GDP (HERD to GDP) has remained relatively steady over the last five years or so, with the latest estimate at 0.62 per cent for 2018.100 With BERD being a key driver of Australia's overall R&D intensity, the GERD to GDP estimate should be interpreted in the context of other information, particularly factors affecting the major contributors, most notably the Mining and Manufacturing industries.101

Figure 3.5.2: Gross expenditure on R&D (GERD), share of GDP, by sector, OECD countries, per cent, latest 2019

100 OECD (2020) Main Science and Technology Indicators 2020/1, OECD Publishing (http://www.oecd.org/sti/msti.htm)

101 ABS, Research and Experimental Development, Businesses, Australia, Cat. No. 8104.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8104.0)

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3.5.3 Business expenditure on R&D (BERD) performed in service industries

Across OECD countries, a sizeable and growing share of BERD is performed in service industries. Service industries supply services, as opposed to physical goods. For example, services include accommodation, recreation, health, education, retail, as well as information and communication technologies (ICTs). In Australia, the share of BERD performed by service industries in 2017–18 was around 61.5 per cent — well above the OECD average of 44.3 per cent. Australia ranks 6th of 34 OECD economies on this metric.102 Only five years earlier, Australian service industries accounted for less than half of total BERD, and a decade ago it was barely above 40 per cent. This broad economic shift towards service industries is occurring across nearly all OECD economies, in part due to the rapid growth in the uptake of new digital technologies. Across OECD economies, ICTs account for a substantial and growing part of BERD, and are disproportionately represented by innovative businesses.103

Figure 3.5.3: Business expenditure on R&D (BERD) performed in service industries, share of total BERD, OECD countries, per cent, latest 2018

102 OECD (2020) Main Science and Technology Indicators 2020/1, OECD Publishing (http://www.oecd.org/sti/msti.htm)

103 OECD (2017) OECD Science, Technology and Industry Scoreboard 2017: The digital transformation, OECD Publishing (https://www.oecd-ilibrary.org/science-and-technology/oecd-science-technology-and-industry-scoreboard-2017_9789264268821-en)

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4 Networks and CollaborationThe content of this chapter draws on data collected and published prior to the COVID-19 outbreak. Until new data becomes available, the COVID-19 page provides some key estimates and information related to the impact of COVID-19 on business activity.

The systems view of innovation brings into focus the importance of the networks connecting individuals and organisations. Knowledge is often highly specialised and fragmented, and some of the economic benefits are unattainable without its transfer and diffusion. Various measures of collaboration can indicate the system's connectedness. It is a widely accepted principle that market incentives are not conducive to the transfer and diffusion of knowledge, implying a clear role for policy facilitate the flow of knowledge across different parts of the system to maximise the benefits of innovation for society at large.

Roughly one in five innovation-active businesses in Australia collaborate for the purpose of innovation. Businesses collaborate primarily with their customers and suppliers, or with other businesses owned by the same company. Collaboration between businesses and the public research sector is generally weak, and international collaboration is weaker still. Business funding of R&D in the higher education research sector is low. Of the modest number of businesses undertaking joint R&D, large businesses and businesses in the Mining or Professional, scientific and technical services industries are most active.

A 2017 project by the Department of Industry, Innovation and Science identified a number of obstacles to business-research collaboration including misaligned priorities, difficulty finding a collaboration partner, and a lack of skills and management capabilities.104 The OECD suggests there is a role for governments and publicly funded research organisations to bring together the right partners with the aim of tackling complex inter-disciplinary challenges. Experience across the OECD shows that investments are often essential in applied research centres, pilot production facilities and demonstration facilities, to take new discoveries from the laboratory to production.105

104 Department of Industry, Innovation and Science (2017) Business Research Collaboration Discovery Report: User Centred Design, BizLab report (https://www.industry.gov.au/data-and-publications/business-research-collaboration-user-centred-design-project)

105 OECD (2018) OECD Science, Technology and Innovation Outlook 2018: Adapting to Technological and Societal Disruption, OECD Publishing (http://www.oecd.org/sti/oecd-science-technology-and-innovation-outlook-25186167.htm)

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4.1 Innovation Connections

4.1.1 Businesses collaborating for the purpose of innovation

The extent to which innovation-active businesses collaborate on innovation provides a measure of connectedness between different parts of the innovation system. Collaboration is any arrangement where organisations work together for mutual benefit and share some of the technical and commercial risks. It explicitly excludes fee for service and franchise arrangements. As such, collaboration involves a degree of trust and interdependence. In 2018–19, the share of innovation-active businesses that collaborated for the purpose of innovation was 14.1 per cent. This represents a continuing decline from 2010–11 when it reached a peak of 23.6 per cent. Larger businesses continue to have a higher proportion of collaboration on innovation than smaller businesses. By far the most collaborative industry sectors (data not shown) remain to be mining (21.2 per cent) and information, media and telecommunications (20.8 per cent), whilst the lowest level of collaboration was in accommodation and food services (6.0 per cent).106

Figure 4.1.1: Businesses collaborating for the purpose of innovation, share of innovation-active businesses, per cent, latest 2018–19

106 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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4.1.2 Businesses collaborating on innovation

The majority of collaboration on innovation by Australian businesses occurs domestically – most commonly with customers or suppliers (data not shown). Importantly, around a quarter of innovation-active businesses that collaborate on innovation, collaborate with another business owned by the same company and operating in Australia (22.4 per cent in 2018–19). This provides a rough indication of the innovation capability embedded within businesses. In 2018–19 only 9.8 per cent reported collaborating on innovation with Australian universities or other higher education institutions. This though is a sizeable increase from the 4.8 per cent reported in both 2014–15 and 2016–17. Partnership arrangements require trust between the business enterprise sector and higher education researchers. International collaboration on innovation occurs at an even lower rate, with just 0.9 per cent of innovation-active businesses collaborating with an overseas higher education institution in 2018–19.107

Figure 4.1.2: Businesses collaborating on innovation, share of innovation-active businesses, by partner, per cent, latest 2018–19

107 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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4.1.3 Businesses collaborating on R&D

A modest subset of innovation-active businesses undertake research and development (R&D). Survey evidence suggests that Australian innovation-active businesses report relatively low rates of collaboration on R&D. In 2018–19, only 3.3 per cent of Australia's innovation-active businesses collaborated on R&D, which is the lowest proportion since 2005–06. By business size (data not shown), large innovation-active businesses reported the highest rates of joint R&D activity, 6.3 per cent in 2018–19. This compares to only 5.6 per cent of innovation-active medium sized businesses and 2.2 per cent of innovation-active small businesses collaborating on R&D in the same period. By industry (data not shown), the mining industry reported the highest share of innovation-active businesses with joint R&D activities at 8.5 per cent.108

Figure 4.1.3: Businesses collaborating on R&D, share of innovation-active businesses, per cent, latest 2018–19

108 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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4.1.4 Businesses collaborating with publicly funded research organisations

Collaboration promotes innovation, as collaborators build on other's knowledge and experience. Patent data on collaboration between businesses and publicly funded research organisations (PFROs) suggests limited interaction between the two sectors in Australia. Among all patent families that include an Australian applicant, only 1.5 per cent involved collaboration in 2018. That said, collaboration varies substantially across technology fields and years; and it is also not present in all fields. In 2018, the technology fields with the largest share of patents involving business and PFRO collaboration were in Biotechnology (11.9 per cent), Macromolecular chemistry, polymers (9.1 per cent) and Food chemistry (5.8 per cent).109 A recent report by IP Australia found that collaborative grants have a higher impact on boosting all types of patent applications than non-collaborative ones. Further, a greater impact is seen for Patent Cooperation Treaty (PCT) applications, where PCT applications are submitted to obtain patent protection within multiple countries.110

Figure 4.1.4: Businesses collaborating with PFROs, share of patent family filings involving Australian applicants, by technology field, per cent, latest 2018

109 European Patent Office (2020) PATSTAT 2020: Spring edition (https://www.epo.org/searching-for-patents/business/patstat.html)

110 IP Australia (2018) IP Report 2018: Collaborative research grants lead to better IP outcomes (https://www.ipaustralia.gov.au/ip-report-2018/research-grants)

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4.1.5 Active licences, options and assignments (LOAs) yielding income for research organisations

Many Australian universities, medical research institutes and public research organisations license intellectual property (IP) to third parties, including businesses. Active LOAs that yield income are a subset of all active LOAs. They reflect high value IP in the research sector, as well as knowledge transfer between sectors. Data from the National Survey of Research Commercialisation (NSRC) provides a time series of the number of active LOAs yielding income in the research sector from 2006 to 2016. A peak in the number of active LOAs occurred in 2013 with 950 agreements reported, and an increase of 12.8 per cent can be seen between 2006 and 2016 with 719 and 811 LOAs reported, respectively.111

Figure 4.1.5: Active LOAs and those yielding income for research organisations, by research organisation, number, latest 2016

111 Department of Industry, Innovation and Science (2019) National Survey of Research Commercialisation (https://www.industry.gov.au/data-and-publications/national-survey-of-research-commercialisation)

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4.1.6 Income from active licences, options and assignments (LOAs) obtained by research organisations

Many Australian universities, medical research institutes and public research organisations license intellectual property (IP) to third parties including businesses. Active LOA deals that yield income provide an indication of IP with high commercial value as well as knowledge transfer between sectors. Survey data shows that total income in the research sector from licensing between 2006 and 2016 was over $2 billion. Over the decade, LOA income varied with spikes seen in 2009 and 2012 which corresponds to large increases in data provided by Commonwealth Scientific and Industrial Research Organisation (CSIRO). This also points to a broader trend — LOA income data often varies from the number of active LOAs executed due to considerable variation at the institutional level in the value of licensing deals.112

Figure 4.1.6: Income from active licences, options and assignments (LOAs) obtained by research organisations, $ million, latest 2016

112 Department of Industry, Innovation and Science (2019) National Survey of Research Commercialisation (https://www.industry.gov.au/data-and-publications/national-survey-of-research-commercialisation)

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4.1.7 Consultancies, contracts and research collaborations with research organisations

A selection of Australian universities, medical research institutes and public research agencies are surveyed each year on their industry engagement via research-based consultancies, fee-for-service contracts and formal research collaborations. These activities provide an indication of how active the research sector is with respect to knowledge transfer to industry. Data shows that the number of consultancies, contracts and research collaborations undertaken from 2006 to 2016 fluctuated with an overall increase over the period. The largest number of consultancies, contracts and collaborations occurred in the most recent years with 18,076 and 18,279 activities reported in 2015 and 2016, respectively.113

Figure 4.1.7: Consultancies, contracts and research collaborations with research organisations, number, latest 2016

113 Department of Industry, Innovation and Science (2019) National Survey of Research Commercialisation (https://www.industry.gov.au/data-and-publications/national-survey-of-research-commercialisation)

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4.1.8 Total gross value of consultancies, contracts and research collaborations with research organisations

A selection of Australian universities, medical research institutes and public research agencies are surveyed each year on industry engagement via research-based consultancies, fee-for-service contracts and formal research collaborations. Data shows that over 2006–2016, the total value of consultancy, contract and collaboration activity in the research sector was $16.1 billion. Compared to income derived from intellectual property (IP) licensing, $2 billion over the same period, this form of knowledge transfer is of significantly greater value. It may suggest consultancies, contracts and collaboration are increasingly the preferred avenue of knowledge transfer to industry over more traditional channels such as IP licensing.114

Figure 4.1.8: Consultancies, contracts and research collaborations with research organisations, gross value, $ billion, latest 2016

114 Department of Industry, Innovation and Science (2019) National Survey of Research Commercialisation (https://www.industry.gov.au/data-and-publications/national-survey-of-research-commercialisation)

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4.2 Absorptive Capacity

4.2.1 Business human resources devoted to R&D

One measure of the capacity of businesses to absorb advanced knowledge is the employment of R&D staff. Evidence shows notable across-the-board increases in business resources devoted to R&D between 2010–11 and 2013–14. These were driven by hiring in small and medium businesses (with up to 199 employees). However, between 2013–14 and 2017–18 large businesses (with 200 or more employees) cut roughly 8,000 R&D-related jobs, which was only partly offset by further hiring in small and medium business in the period (up around 4,000 and 1,000 R&D-related jobs, respectively). By resource type, the main impact of these changes has been felt by Researchers, whose employment in business declined from around 39,100 person-year equivalent in 2013–14 to roughly 34,600 in 2017–18. The most recent data shows a tentative increase over the two years to 2017–18. It is possible that the longer-term pattern is related to a general shift away from large businesses towards small and medium businesses, accompanied by a shift away from Engineering towards Information and computing sciences, as seen in the data by field of research.115

Figure 4.2.1: Business human resources devoted to R&D, by type of resource, person-year equivalent, latest 2017–18

115 ABS, Research and Experimental Development, Businesses, Australia, Cat. No. 8104.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8104.0)

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4.2.2 Government human resources devoted to R&D

In any sector, researchers are the main subset of the total human resources devoted to R&D. Important non-research functions related to the conduct of R&D are performed by personnel including Technicians and Support staff. In the government sector across both Commonwealth, state and territory governments, Researchers consistently account for around half of total government human resources devoted to R&D (7,570 person-year equivalent out of 14,521 in 2018–19). Commonwealth human resources devoted to R&D — including not only Researchers but also Technicians and Support staff — peaked in 2012–13 at 9,820 person-year equivalent before declining to 7,763 in 2018–19.116

Figure 4.2.2: Government human resources devoted to R&D, by level of government, by type of resource, person-year equivalent, latest 2018–19

116 ABS, Research and Experimental Development, Government and Private Non-Profit Organisations, Australia, Cat. No. 8109.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8109.0)

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4.2.3 Higher education human resources devoted to R&D

Total human resources devoted to R&D by the higher education sector increased from about 35,400 person-year equivalent in 1992 to more than 81,700 person-year equivalent in 2018. About 56 per cent of these resources are Postgraduate students. A further 30 per cent are Academic staff and the remainder are Technical and other staff. These proportions have remained broadly steady over the last decade. Growth in total human resources devoted to R&D has been positive since 1992 and has averaged 1.8 per cent per year over the last decade.117 This compares favourably with Australia's average population growth rate of 1.5 per cent over the same period and indicates that Australia's human resources devoted to R&D has been slightly outpacing population growth.118

Figure 4.2.3: Higher education resources devoted to R&D (HERD), by human resources, person-year equivalent, latest 2018

117 ABS, Research and Experimental Development, Higher Education Organisations, Australia, Cat. No. 8111.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8111.0)

118 ABS (2020), Australian Demographic Statistics, Dec 2019, Cat. No. 3101.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/3101.0)

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4.3 Government Engagement

4.3.1 Businesses receiving government financial assistance

In 2018–19, just over 1 in 10 Australian business (12.8 per cent) received any form of financial assistance from either Commonwealth, state/territory or local governments for innovation. Business size largely determines the share of businesses receiving government financial assistance. Large businesses, those with 200 or more employees, receive the most financial assistance, but this assistance also fluctuates over time. Large businesses who received Tax concessions halved from 21.9 per cent in 2011–12 to 10.3 per cent in 2018–19. Similarly, 28.5 per cent of large businesses received government Grants in 2007–08, whilst only 15.6 per cent did so in 2018–19. By industry (data not shown), the highest proportions of all businesses receiving financial assistance in 2018–19 were in Agriculture, forestry and fishing (36.3 per cent) and Mining (23.9 per cent).119

Figure 4.3.1: Businesses receiving government financial assistance, by business size, per cent, latest 2018–19

119 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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4.3.2 Innovation-active businesses receiving public support for innovation

Australia has the third lowest proportion of innovation-active businesses receiving public support for innovation in the OECD (only 10.1 per cent in 2016–17, compared to 25.0 per cent for the latest available OECD average). The data only capture businesses pursuing product and/or process innovation.120 For context, it is important to note that Australia has a large services sector, and that ABS estimates cover a broader range of business innovation activity than product and/or process innovation. For 2017–18, the ABS data show that some 49.8 per cent of all Australian businesses were identified as innovation active.121 That said, the OECD estimate for Australia seems low relative to other countries, so the potential benefits and costs of expanding the take-up of the relevant business innovation initiatives may be worth investigating further.

Figure 4.3.2: Innovation-active businesses receiving public support for innovation, only relates to product and/or process innovation, by category, OECD countries, per cent, latest 2019

120 OECD (2019) Innovation indicators, OECD Publishing (http://www.oecd.org/innovation/inno/inno-stats.htm)

121 ABS, Characteristics of Australian Business, Cat. No. 8167.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/8167.0)

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4.3.3 Innovation-active businesses with public procurement contracts

Public procurement affects innovation by influencing the demand conditions in which businesses innovate and compete. The use of public procurement as a tool of innovation has been gaining in popularity in recent years, and there are some notable examples of long-standing successful adoption of such policies. However, the evidence base on the effectiveness and economic value of this type of support is surprisingly sparse. A recent survey of evidence suggests that the barriers encountered by businesses generally correspond to the deficiencies addressed by procurement policies but are not sufficiently addressed by them.122 In 2014–15, Australia's share of innovation-active businesses with public procurement contracts was estimated at 21.7 per cent, below the latest available OECD average estimate of 26.1 per cent. Countries with the highest proportions include Finland, Iceland, Austria and Norway.123 The data only relate to businesses pursuing product and/or process innovation.

Figure 4.3.3: Innovation-active businesses with public procurement contracts, only relates to product and/or process innovation, by category, OECD countries, per cent, latest 2017

122 Georghiou L, Edler J, Uyarra E and Yeow J (2014) Policy instruments for public procurement of innovation: Choice, design and assessment, Technological Forecasting and Social Change, Volume 86, July 2014, Pages 1–12 (https://www.sciencedirect.com/science/article/pii/S0040162513002552)

123 OECD (2017) Innovation indicators, OECD Publishing (http://www.oecd.org/innovation/inno/inno-stats.htm)

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4.4 International Comparison

4.4.1 Business funding of higher education R&D (HERD)

Business funding of R&D performed by higher education institutions provides a measure of R&D collaboration between the business and research sectors. Businesses may also support higher education expenditure on R&D (HERD) indirectly by paying to use the R&D facilities of higher education institutions, buying R&D results, or investing in spin-off companies.124 Australia's performance on this metric is relatively modest compared to other OECD economies with 4.9 per cent of higher education expenditure on R&D financed by the business sector in 2018, which is below the OECD average of 6.2 per cent. Australia's below-average performance on this metric is persistent over time. Over the past 15 years the share of HERD financed by the business sector has remained below the 7.0 per cent mark, peaking in 2006 at 6.8 per cent. Among OECD member countries, the share of HERD financed by business in 2018 was highest in South Korea (14.3 per cent) and Germany (13.5 per cent)125

Figure 4.4.1: Higher education expenditure on R&D (HERD) funded by businesses, share of total HERD, OECD countries, per cent, latest 2019

124 OECD (2017) OECD Science, Technology and Industry Scoreboard 2017: The digital transformation, OECD Publishing (https://www.oecd-ilibrary.org/science-and-technology/oecd-science-technology-and-industry-scoreboard-2017_9789264268821-en)

125 OECD (2020) Main Science and Technology Indicators 2020/1, OECD Publishing (http://www.oecd.org/sti/msti.htm)

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4.4.2 Businesses collaborating on innovation

Australia's low rates of business collaboration turn up consistently across multiple metrics. One common measure is the share of innovation-active businesses that collaborate on innovation. On this measure, around 21.6 per cent of Australian innovation-active businesses are estimated to have engaged in some form of collaboration when developing or introducing innovation in 2016–17. By itself, this estimate may not seem particularly low — especially when compared with some of the other measures of collaboration — and it is certainly not the lowest result across the OECD countries. However, it is still considerably less than the latest available OECD average for this metric of 34.7 per cent. Another useful metric is collaborative R&D by R&D-active businesses. For 2016–17, 40 per cent of Australian businesses collaborating on innovation undertake R&D, which is below the OECD average of 47 per cent. Australia ranks 26th on this metric out of 35 countries.126

Figure 4.4.2: Innovation-active businesses collaborating on innovation, only relates to product and/or process innovation, by category, OECD countries, per cent, latest 2019

126 OECD (2019) Innovation indicators, OECD Publishing (http://www.oecd.org/innovation/inno/inno-stats.htm)

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4.4.3 Businesses collaborating on innovation with higher education or government institutions

Australia ranks last in the OECD for business collaboration on innovation with higher education or government institutions - at just 1.6 per cent of all product and/or process innovation-active businesses in 2016–17. This compares poorly to the OECD average of 14.2 per cent and far below countries such as the United Kingdom, Finland and Austria, where one in four innovating businesses collaborate with either the research or government sectors. It is also arguably the weakest result across a range of similar measures, and reflects unfavourably on the ability of Australian businesses and research institutions to maximise the return on public investment in science and research.127 Noting the caveats around methodological and scope differences between the different data sources, the result nevertheless stands in stark contrast with both the high quality of Australia's research outputs and the solid rates of innovation across the business enterprise sector.128129

Figure 4.4.3: Innovation-active businesses collaborating with higher ed. or government, only relates to product and/or process innovation, by category, OECD countries, per cent, latest 2019

127 OECD (2019) Innovation indicators, OECD Publishing (http://www.oecd.org/innovation/inno/inno-stats.htm)

128 Clarivate Analytics (2018) Incites, Web of Science Group (https://clarivate.com/webofsciencegroup/solutions/incites/)

129 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (http://www.abs.gov.au)

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5 Skills and CapabilityThe content of this chapter draws on data collected and published prior to the COVID-19 outbreak. Until new data becomes available, the COVID-19 page provides some key estimates and information related to the impact of COVID-19 on business activity.

Innovation is about the creation, application and diffusion of knowledge — and skills and capability are at the very core of these processes. It is from the interplay of people working, collaborating and competing across the system that innovation and technological progress emerge. Human capital, intellectual property, and a range of other intangibles jointly represent the accumulated stock of knowledge. In the business enterprise sector, knowledge-based (or intangible) capital represents a substantial and growing investment. For example, experimental estimates suggest that Australian businesses invested approximately $21.2 billion on organisational capital in 2012–13 alone.130

Computer software is one intangible asset that has seen dramatic investment growth over the last three decades. The transformative potential of Big Data, the Internet of Things and Artificial Intelligence, is starting to be recognised. At the same time, these disruptive technologies have prompted debates around digital privacy and the future of work. Some estimates suggest intelligent technology could be capable of automating the tasks of 44 per cent of Australian jobs in the coming decades.131 However, historically, technological disruptions have not led to mass unemployment — instead they left the most difficult, dangerous and back-breaking work to machines, and created new and better jobs for people.

Another important intangible asset is the accumulated knowledge generated from research activity. The higher education sector has historically been the largest employer of research personnel in Australia, and in recent years, the higher education research workforce increased substantially. By contrast, Australia's business and government sectors have both cut back dramatically on the number of researchers employed in recent times. Finally, management capability is equally as important. Recent Australian evidence suggests that management capability is positively associated with labour productivity, higher levels of innovation and more engagement in collaboration.132

130 Bucifal S and Bulic F (2016) Updating investment estimates for Australia's organisational capital, Department of Industry, Innovation and Science, Office of the Chief Economist research paper 2/2016 (https://www.industry.gov.au/sites/default/files/May%202018/document/pdf/updating_investment_estimates_for_australias_organisational_capital.pdf)

131 Edmonds D and Bradley T (2016) Mechanical boon: will automation advance Australia?, Department of Industry, Innovation and Science; Office of the Chief Economist research paper 7/2015 (https://www.industry.gov.au/sites/default/files/June%202018/document/pdf/mechanical-boon_-_will_automation_advance_australia.pdf)

132 Moran I, Balaguer A, Majeed O, Agarwal R, Bajada C and Brown P J (2018) Strategic management in Australian firms, Department of Industry, Innovation and Science, Office of the Chief Economist working paper (https://www.industry.gov.au/sites/default/files/2018-12/oce-strategic-management-in-australian-firms.pdf)

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5.1 Education and Workforce

5.1.1 Adults with school and non-school qualifications

The progression from secondary education to both tertiary academic studies and vocational qualifications is an important step towards the formation of specialised skills and capabilities in a variety of fields and disciplines. The share of Australian adults with a University degree has risen from 23.0 per cent in 2009 to 28.4 per cent in 2019. The share of those with a Certificate or diploma has also risen over the same period from 24.8 per cent to 27.2 per cent. Consequently, the share of adults with Year 12 or Year 11 or below qualifications have fallen over this period. All four measures are affected by a change to the age range question that was introduced in the 2014 survey. This change added older people (aged 65–74 years) to the survey population and consequently increased the share of adults with Year 11 or below qualifications, whilst decreasing the other categories.133

Figure 5.1.1: Adults with school and non-school qualifications, by education level, per cent, latest 2019

133 ABS, Education and Work, Australia, Cat. No. 6227.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/6227.0)

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5.1.2 Adults with non-school qualifications by field of study

Students' choice of field of study may be guided by many factors, including personal aspirations; previous experience; education assessment results; or perceptions of future employment prospects. In 2019, the top three successfully attained fields of study represented in the adult population with non-school qualifications in Australia were Management and commerce (23.3 per cent), Engineering (16.5 per cent) and Society and culture (14.7 per cent). The proportions of different fields of study represented in the adult population with non-school qualifications remained broadly constant between 2015 and 2019.134

Figure 5.1.2: Adults with non-school qualifications, by field of study, per cent, latest 2019

134 ABS, Education and Work, Australia, Cat. No. 6227.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/6227.0)

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5.1.3 Adults studying for a non-school qualification by field of study

Management and commerce as a field of study is attracting the most non-school students (around 443,000 in 2018), and has done consistently since 2015. This is followed by Society and culture (just over 329,000) and Engineering (299,000) which frequently switch between second and third place. Other popular fields include Architecture and building (161,000), Health (135,000), Food and hospitality (129,000) and Education (119,000). Overall non-school numbers have shrunk over the years from nearly 2.4 million in 2015 to just over 2 million in 2018.135

Figure 5.1.3: Adults studying for a non-school qualification, by field of study, persons, latest 2018

135 NCVER VOCSTATS – National VET Provider Collection, extracted on 31/01/2020 (https://www.ncver.edu.au/research-and-statistics/collections/students-and-courses-collection)

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5.1.4 Apprentices and trainees by occupation

The labour force of a modern economy requires diverse skills and qualifications. However, evidence suggests that the occupations of apprentices and trainees (i.e. labour force in the pipeline) have become less diverse in recent years. In 2019, over half of all apprentices and trainees worked in just three fields: Construction (57,000 in 2019), Automotive and engineering (46,000) and Electrotechnology and telecommunications (40,000). Construction and Automotive and engineering have been very popular since at least 2000, while Electrotechnology and telecommunications has gradually gained popularity over time. Other occupations peaked in 2012 and have fallen since then, particularly Sales assistants (from 40,000 in 2012 to 11,000 in 2019), Specialist managers (from 37,000 in 2012 to 530 in 2019) and Office managers (32,000 in 2012 to around 3,200 in 2019). This is partly driven by changes to the financial incentives under the Australian Apprenticeships Incentives Program since 2012. These changes have primarily affected non-National Skills Needs Lists apprenticeships and traineeships.136

Figure 5.1.4: Apprentices and trainees in training, by occupation, persons, latest 2019

136 NCVER VOCSTATS – National Apprentice and Trainee Collection, extracted on 13/08/2020 (https://www.ncver.edu.au/research-and-statistics/collections/apprentices-and-trainees-collection)

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5.1.5 Apprentices and trainees by employer industry

Vocational study is most useful when students can work in the same field as their studies. The great majority of apprentices and trainees (in training) work in the Construction industry (90,000 in 2019). This has been the most popular industry of employment since 2007, and the only employer industry not to shrink significantly since 2012. All other major employer industries peaked in 2012 and have declined since then. Manufacturing declined by more than 60 per cent (from 61,000 in 2012 to 23,000 in 2019) and Accommodation and food services fell by more than 50 per cent (47,000 in 2012 to 21,000 in 2019). The peak in 2012 and subsequent decline were partly driven by changes to the financial incentives under the Australian Apprenticeships Incentives Program since 2012. These changes have primarily affected non-National Skills Needs Lists apprenticeships and traineeships. The Construction industry was not affected, and its numbers have continued to climb since 2012.137

Figure 5.1.5: Apprentices and trainees in training, by employer industry, persons, latest 2019

137 NCVER VOCSTATS – National Apprentice and Trainee Collection, extracted on 13/08/2020 (https://www.ncver.edu.au/research-and-statistics/collections/apprentices-and-trainees-collection)

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5.2 Innovation Capability

5.2.1 R&D personnel by sector

Researchers and other R&D personnel constitute a vital input to R&D activity. In Australia, the number of R&D personnel in the business and higher education sectors have increased dramatically since the turn of the century, while their numbers in the government sector have declined over the same period. Business sector R&D personnel numbers nearly doubled, from around 35,900 in 2002 to nearly 75,000 in 2017. The rise in R&D personnel numbers in the higher education sector was more modest, but still significant (from 49,600 in 2002 to 79,000 in 2016). By contrast, the number of R&D personnel in government declined in the same period, from 18,500 to 14,800. Based on the OECD definition, R&D personnel include all persons employed directly in R&D activities, and comprises researchers, technicians and support staff. R&D personnel are represented in full-time equivalent units defined as the ratio of working hours actually spent on R&D during a specific reference period divided by the total number of hours worked in the same period by an individual or a group. In Australia, as well as in many other OECD countries, the business enterprise and higher education sectors are the leading employers of R&D personnel.138139

Figure 5.2.1: R&D personnel, by sector, OECD countries, full-time equivalent, latest 2018

138 OECD (2020) Main Science and Technology Indicators 2020/1, OECD Publishing (http://www.oecd.org/sti/msti.htm)

139 OECD (2017) OECD Science, Technology and Industry Scoreboard 2017: The digital transformation, OECD Publishing (https://www.oecd-ilibrary.org/science-and-technology/oecd-science-technology-and-industry-scoreboard-2017_9789264268821-en)

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5.2.2 Innovation-active businesses that operate in international markets

Evidence from Australian microdata suggests that innovation-active businesses are 4 to 8 per cent more likely to be exporters compared to businesses that do not innovate, while exporters are 7 to 10 per cent more likely to be innovators.140 Microdata evidence further suggests that more than one-third of Australian exporters are concentrated in just four industries: Mining, Manufacturing, Wholesale trade and Information media and telecommunications.141 In 2016–17, 47.5 per cent of Australian businesses operating in international markets were innovative. This compares to the latest available OECD average of 58.3 per cent. The leaders in this field were Canada (88.1 per cent), Norway (82.3 per cent) and Switzerland (80.8 per cent).142 The data only relate to businesses pursuing product and/or process innovation.

Figure 5.2.2: Innovation-active businesses that operate in international markets, only relates to product and/or process innovation, by category, OECD countries, per cent, latest 2019

140 Tuhin R (2016) Modelling the relationship between innovation and exporting: Evidence from Australian SMEs, Department of Industry, Innovation and Science, Office of the Chief Economist research paper 3/2016 (https://www.industry.gov.au/sites/default/files/May%202018/document/pdf/modelling_the_relationship_between_innovation_and_exporting_-_evidence_from_australian_smes.pdf)

141 Tuhin R and Swanepoel J A (2017) Export behaviour and business performance: Evidence from Australian microdata, Department of Industry, Innovation and Science, Office of the Chief Economist research paper 3/2016 (https://www.industry.gov.au/sites/default/files/June%202018/document/pdf/export_behaviour_and_business_performance_-_evidence_from_australian_microdata_research.pdf)

142 OECD (2019) Innovation indicators, OECD Publishing (http://www.oecd.org/innovation/inno/inno-stats.htm)

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5.2.3 Australian exports with a revealed comparative advantage (RCA) index above two

RCA is an important measure of export competitiveness. It measures a country's relative advantage in a certain class of products as evidenced by export flows. For values above one, a higher RCA index value implies a stronger export competitive advantage.143 Between 1993 and 2016, the number of products with an RCA index above two dropped by 117 (from 336 to 219), while their export value increased by $119 billion or 387 per cent. In other words, Australia has become more specialised in exporting fewer product classes at a considerably higher value. This shift has been driven by a very limited number of mineral commodities for which Australia exhibits a super-competitive position in the world. In the export of iron ore, for instance, Australia has an RCA index of around 53 — meaning we are 53 times more competitive at producing and exporting iron ore than the world average. However, an excessive concentration of exports in a handful of mineral commodities is risky, as the prices of those commodities are set by global markets. Australia's lack of export diversity could therefore weigh on growth prospects in the future.144

Figure 5.2.3: Products with RCA index above 2.0 and export value, number, latest 2016

143 Department of Industry, Innovation and Science (2014) Australian Innovation System Report 2014, Office of the Chief Economist (https://www.industry.gov.au/sites/default/files/May%202018/document/pdf/australian_innovation_system_report_2014.pdf)

144 Department of Industry, Innovation and Science (2018) Economic Insight: Australia's low complexity – should we be concerned?, Office of the Chief Economist research paper 2/2016 (https://mailchi.mp/33fc6728e911/checking-out-a-case-study-in-automation-1165579?e=d0f51f013d)

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5.2.4 Selected sources of ideas for innovation

Survey evidence suggests that ideas for innovation mostly originate from Within the business or related company, with around half of them reporting their own business or another business owned by the same company as the main source of ideas. Large businesses are more likely than small and medium businesses to generate these type of ideas, as they have access to a larger pool of talent and human resources. At the other end of the spectrum are external sources of ideas, such as from Universities or other higher education institutions. Although they are much less likely to be identified as the source of ideas, they can provide specialised advice or technical expertise to implement them. Less than 3 per cent of innovation-active businesses reported their ideas or information for innovation originating from these sources and these are most common in the mining, scientific and health care industries (data not shown).145

Figure 5.2.4: Selected sources of ideas for innovation, share of innovation-active businesses, per cent, latest 2018–19

145 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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5.3 Intangible Capital

5.3.1 Intangible capital investment

The uneven pattern of productivity gains associated with the rise of the so-called knowledge economy — more prevalent in some firms, industries and countries than others — has brought attention to the role of investments in certain intangible assets such as computerised information (e.g. databases), innovative property (e.g. patents and designs) and economic competencies (e.g. human capital). Few attempts have been made to date to comprehensively measure all the relevant intangibles identified in literature.146 For the few intangibles that are currently measured and published in the national accounts, the largest share of Australia's market sector investment was traditionally directed to Research and development. However, this pattern has been changing. Since 2016–17, Computer software has been attracting the largest share of investment. Over three decades in terms of chain volume measures, this asset has seen dramatic and sustained investment growth, rising from just under $1 billion in 1989–90 to $24.6 billion in 2018–19. The other significant trend has been in Mineral and petroleum exploration, which led intangible investment prior to the mid-1980s. It peaked in 2012–13 before falling back dramatically to $3.0 billion in 2017–18. The latest estimate is at $3.5 billion in 2018–19.147

Figure 5.3.1: Gross intangible capital investment, by type of capital, by current prices or chain volume, $ billion, latest 2018–19

146 Barnes P and McClure A (2009) Investments in Intangible Assets and Australia's Productivity Growth, Productivity Commission staff working paper (https://www.pc.gov.au/research/supporting/intangible-investment/intangible-investment.pdf)

147 ABS, Australian System of National Accounts, Cat. No. 5204.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/5204.0)

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5.3.2 Intangible capital stock

Experimental estimates to date suggest that the aggregate value of Australia's intangible capital stock is substantial and growing.148 Until around 2004–05, the largest share was Mineral and petroleum exploration but this was subsequently overtaken by Research and development. These two assets continue to dominate Australia's intangible capital stock, accounting for around 77.4 per cent of total measured intangibles, or $192.9 billion as at June 2019.149 For comparison, Australia's aggregate stock of physical capital in the form of Machinery and equipment stood at around $621.9 billion at June 2019, roughly 2.5 times the size of total measured intangibles. This comparison underestimates the true size of intangibles since several important assets are currently not being measured, most notably organisational capital and business-specific human capital. Recent experimental estimates of Australia's organisational capital were published by the Office of the Chief Economist in 2016.150

Figure 5.3.2: Net intangible capital stock, by type of capital, by current prices or chain volume, $ billion, latest 2018–19

148 Barnes P and McClure A (2009) Investments in Intangible Assets and Australia's Productivity Growth, Productivity Commission staff working paper (https://www.pc.gov.au/research/supporting/intangible-investment/intangible-investment.pdf)

149 ABS, Australian System of National Accounts, Cat. No. 5204.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/5204.0)

150 Bucifal S and Bulic F (2016) Updating investment estimates for Australia's organisational capital, Department of Industry, Innovation and Science, Office of the Chief Economist research paper 2/2016 (https://www.industry.gov.au/sites/default/files/May%202018/document/pdf/updating_investment_estimates_for_australias_organisational_capital.pdf)

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5.3.3 Business investment in intangible capital

Intellectual property rights denote investment in intangible assets, such as branding and design. Spending on intangible capital investments by Australian businesses has seen sustained growth over the past 40 years. In terms of chain volume measures, the data shows the effect from the mining boom, which wound down from 2013.151 Business investment in intangible capital increased until 2012–13 to $36.5 billion and fell to $33.6 billion by 2015–16, before rising to $39.6 billion in 2018–19. Similarly, Business investment in intangible capital as a share of new capital investments decreased from 2010–11, when investments focused on more tangible assets, before increasing to 11.4 per cent in 2018–19.152

Figure 5.3.3: Gross business investment in intangible capital, by current prices or chain volume, $ billion, latest 2018–19

151 Minifie J (2017) Stagnation Nation? Australian investment in a low-growth world, Grattan Institute report (https://www.ipaustralia.gov.au/ip-report-2020/welcome)

152 ABS, Australian System of National Accounts, Cat. No. 5204.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/5204.0)

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5.3.4 Patent family filings involving Australian applicants

Patent filings are a key indicator of inventive activity. Applications filed in different jurisdictions but claiming the same priority make up a patent family. IP Australia reports that 2,637 resident patent applications were filed in 2019, a slight decrease of 4.3 per cent from 2018 (data not shown).153 The European Patent Office data shows that, for Australia, the number of patent family filings has remained relatively stable since 2006, with data for 2018 reflecting a part-year effect.154

Figure 5.3.4: Patent family filings involving Australian applicants, total, number, latest 2018

153 IP Australia (2020) Australian Intellectual Property Report 2020 (https://www.ipaustralia.gov.au/ip-report-2020)

154 European Patent Office (2020) PATSTAT 2020: Spring edition (https://www.epo.org/searching-for-patents/business/patstat.html)

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5.3.5 Patent family filings involving Australian applicants by technology field

Applications filed in different jurisdictions but claiming the same priority make up a patent family. The European Patent Office data shows that patent family filings were most concentrated in the Civil engineering field with 429 patent families filed in 2017. Data for 2018 reflects a part-year effect. Significant positive growth has occurred in patent families over the last 10 years relating to Electrical machinery, apparatus, energy (51 per cent), Digital communication (35 per cent) and IT methods for management (34 per cent). A large number of technological fields have also seen significant declines, such as Textile and paper machines (60 per cent), Basic communication processes (36 per cent) and Organic fine chemistry (55 per cent).155

Figure 5.3.5: Patent family filings involving Australian applicants, by technology field, number, latest 2018

155 European Patent Office (2020) PATSTAT 2020: Spring edition (https://www.epo.org/searching-for-patents/business/patstat.html)

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5.4 International Comparison

5.4.1 Total expenditure on educational institutions as a share of GDP

Education represents a bedrock investment into personal, national and global development. This is especially true for countries pursuing knowledge-based growth as a means to shoring up prosperity and combating inequality. Among OECD countries, Australia has the 8th highest expenditure on educational institutions as a proportion of GDP (5.8 per cent in 2016–17) — well above the OECD average of 4.8 per cent.156 While the majority of this expenditure is publicly funded, Australia's reliance on private funding of education is not common in other OECD countries.

Figure 5.4.1: Expenditure on educational institutions, share of GDP, OECD countries, per cent, latest 2017

156 OECD (2018) Education at a Glance 2018: OECD Indicators, OECD Publishing (http://www.oecd.org/education/education-at-a-glance/)

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5.4.2 Expenditure on tertiary education institutions as a share of GDP

Australia's expenditure on tertiary education institutions relative to GDP is the 4th highest in the OECD, having increased from 1.52 per cent in 2005–06 to 1.91 per cent in 2016–17.157 Higher education provides substantial economic and social benefits. According to a recent study, education related exports made up 5.7 per cent of Australia's total exports in 2014–15, representing the largest service export and the third largest export category overall with higher education representing roughly two thirds of this. The study estimated the value that university education adds to Australia's productive capacity at $140 billion in GDP in 2014, lifting GDP by around 8.5 per cent. Beyond the economic benefits to labour force outcomes, higher education has been found in other studies to be positively associated with improved health outcomes, quality of life and a range of other social well-being measures.158

Figure 5.4.2: Expenditure on tertiary education institutions, share of GDP, OECD countries, per cent, latest 2017

157 OECD (2018) Education at a Glance 2018: OECD Indicators, OECD Publishing (http://www.oecd.org/education/education-at-a-glance/)

158 Deloitte Access Economics (2016) Estimating the public and private benefits of higher education, Report for the Department of Education and Training (https://docs.education.gov.au/system/files/doc/other/dae-det_benefits_of_higher_education_final_report.pdf)

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5.4.3 Adults attaining a tertiary qualification

Tertiary qualifications deliver multiple private and public benefits. According to one recent study, disciplines such as health, education, engineering and business tend to have the largest significant positive wage premiums, and around 55 per cent of the benefits associated with Tertiary qualifications were estimated to be public.159 A percentage point increase in the share of workers with tertiary education in a city is associated with a 1.31 per cent increase in wages.160 Australia's overall proportion of adult population (aged 25 to 64) with Tertiary qualifications is the 7th highest in the OECD, having increased substantially in a relatively short period — from 31.7 per cent in 2005–06 to 45.7 per cent in 2018–19.161

Figure 5.4.3: Adults attaining a tertiary education, share of working-age adults, OECD countries, per cent, latest 2018

159 Deloitte Access Economics (2016) Estimating the public and private benefits of higher education, Report for the Department of Education and Training (https://docs.education.gov.au/system/files/doc/other/dae-det_benefits_of_higher_education_final_report.pdf)

160 Moretti E (2004) Estimating the social return to higher education: Evidence from longitudinal and repeated cross-sectional data, Journal of Econometrics, 121(1–2), 175–212 (https://eml.berkeley.edu/~moretti/socret.pdf)

161 OECD (2018) Education at a Glance 2018: OECD Indicators, OECD Publishing (http://www.oecd.org/education/education-at-a-glance/)

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5.4.4 Adults attaining a vocational qualification

Vocational education and training (VET) has important economic benefits that tend to be stronger in certain technological contexts. A recent cross-country study compared the effect on labour productivity of different VET systems using data from six EU member countries. It found multiple patterns of skill complementarity — especially in production-oriented sectors, in the presence of ICTs and in countries with apprenticeship-based VET systems. The complementarity between different skill types was weaker in service-oriented sectors and generally absent for countries with classroom-based VET systems.162 Australia is primarily a service-oriented economy with a relatively modest proportion of adult population with VET qualifications. In 2018–19, some 20.9 per cent of Australia's adults (aged 25 to 64 years) had VET qualifications, which is at the lower end of the spectrum among OECD countries.163

Figure 5.4.4: Adults attaining vocational education, share of working-age adults, OECD countries, per cent, latest 2018

162 European Centre for the Development of Vocational Training (2014) Macroeconomic benefits of vocation education and training, Research paper No. 40 (https://www.cedefop.europa.eu/files/5540_en.pdf)

163 OECD (2018) Education at a Glance 2018: OECD Indicators, OECD Publishing (http://www.oecd.org/education/education-at-a-glance/)

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5.4.5 Government effectiveness

The degree of trust in government can be an important determinant of general polity effectiveness. Low levels of trust can reduce compliance with laws and regulations, diminish investor confidence, and increase risk aversion. This is likely to have a negative impact on policy outcome.164 The World Bank measures the capacity of governments to effectively formulate and implement sound policies in its report on World Government Indicators. This captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.165 The World Bank data suggests that Australia rates well on government effectiveness among OECD members. Other OECD members with high measures of government effectiveness include Switzerland, Canada, Japan, New Zealand and the United States. Australia's performance on this measure peaked in 2004 and has since declined. This result would suggest that Australia's innovation environment could be supported by a greater focus on increasing government effectiveness.166

Figure 5.4.5: Worldwide governance indicators, government effectiveness, OECD countries, index points, latest 2018

164 OECD (2015) The Innovation Imperative: Contributing to Productivity, Growth and Well-Being, OECD Publishing (https://www.oecd-ilibrary.org/science-and-technology/the-innovation-imperative_9789264239814-en)

165 World Bank (2010) The Worldwide Governance Indicators Methodology and Analytical Issues, World Bank Policy Research Working Paper No. 5430 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1682130)

166 World Bank, Worldwide Governance Indicators (https://info.worldbank.org/governance/wgi/)

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5.4.6 Regulatory quality

An important factor contributing to a government's capacity to formulate and implement sound policies is the quality of its regulatory environment. The World Bank publishes an indicator that captures perceptions of the ability of governments to formulate and implement sound policies and regulations that permit and promote private sector development. This indicator allows comparison of regulatory quality between countries.167 World Bank data suggests that Australia rates well on regulatory quality among OECD members. Other OECD members with high measures of regulatory quality include the Netherlands, New Zealand, the United Kingdom and Germany. Australia's regulatory quality has been rising since 2005. This suggests that regulation is unlikely to be a major barrier to business innovation in Australia.168 This conclusion is consistent with ABS data showing that government regulations or compliance concerns represent only the fifth most significant barrier to innovation.169

Figure 5.4.6: Worldwide governance indicators, regulatory quality, OECD countries, index points, latest 2018

167 World Bank (2010) The Worldwide Governance Indicators Methodology and Analytical Issues, World Bank Policy Research Working Paper No. 5430 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1682130)

168 World Bank, Worldwide Governance Indicators (https://info.worldbank.org/governance/wgi/)

169 ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)

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Citations

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[131]: Edmonds D and Bradley T (2016) Mechanical boon: will automation advance Australia?, Department of Industry, Innovation and Science; Office of the Chief Economist research paper 7/2015 (https://www.industry.gov.au/sites/default/files/June%202018/document/pdf/mechanical-boon_-_will_automation_advance_australia.pdf)[132]: Moran I, Balaguer A, Majeed O, Agarwal R, Bajada C and Brown P J (2018) Strategic management in Australian firms, Department of Industry, Innovation and Science, Office of the Chief Economist working paper (https://www.industry.gov.au/sites/default/files/2018-12/oce-strategic-management-in-australian-firms.pdf)[133]: ABS, Education and Work, Australia, Cat. No. 6227.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/6227.0)[134]: ABS, Education and Work, Australia, Cat. No. 6227.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/6227.0)[135]: NCVER VOCSTATS – National VET Provider Collection, extracted on 31/01/2020 (https://www.ncver.edu.au/research-and-statistics/collections/students-and-courses-collection)[136]: NCVER VOCSTATS – National Apprentice and Trainee Collection, extracted on 13/08/2020 (https://www.ncver.edu.au/research-and-statistics/collections/apprentices-and-trainees-collection)[137]: NCVER VOCSTATS – National Apprentice and Trainee Collection, extracted on 13/08/2020 (https://www.ncver.edu.au/research-and-statistics/collections/apprentices-and-trainees-collection)[138]: OECD (2020) Main Science and Technology Indicators 2020/1, OECD Publishing (http://www.oecd.org/sti/msti.htm)[139]: OECD (2017) OECD Science, Technology and Industry Scoreboard 2017: The digital transformation, OECD Publishing (https://www.oecd-ilibrary.org/science-and-technology/oecd-science-technology-and-industry-scoreboard-2017_9789264268821-en)[140]: Tuhin R (2016) Modelling the relationship between innovation and exporting: Evidence from Australian SMEs, Department of Industry, Innovation and Science, Office of the Chief Economist research paper 3/2016 (https://www.industry.gov.au/sites/default/files/May%202018/document/pdf/modelling_the_relationship_between_innovation_and_exporting_-_evidence_from_australian_smes.pdf)[141]: Tuhin R and Swanepoel J A (2017) Export behaviour and business performance: Evidence from Australian microdata, Department of Industry, Innovation and Science, Office of the Chief Economist research paper 3/2016 (https://www.industry.gov.au/sites/default/files/June%202018/document/pdf/export_behaviour_and_business_performance_-_evidence_from_australian_microdata_research.pdf)[142]: OECD (2019) Innovation indicators, OECD Publishing (http://www.oecd.org/innovation/inno/inno-stats.htm)[143]: Department of Industry, Innovation and Science (2014) Australian Innovation System Report 2014, Office of the Chief Economist (https://www.industry.gov.au/sites/default/files/May%202018/document/pdf/australian_innovation_system_report_2014.pdf)[144]: Department of Industry, Innovation and Science (2018) Economic Insight: Australia's low complexity – should we be concerned?, Office of the Chief Economist research paper 2/2016 (https://mailchi.mp/33fc6728e911/checking-out-a-case-study-in-automation-1165579?e=d0f51f013d)[145]: ABS, Characteristics of Australian Business, Cat. No. 8129.0, Cat. No. 8158.0, Cat. No. 8166.0, Cat. No. 8167.0 and ABS.Stat (https://www.abs.gov.au/)[146]: Barnes P and McClure A (2009) Investments in Intangible Assets and Australia's Productivity Growth, Productivity Commission staff working paper (https://www.pc.gov.au/research/supporting/intangible-investment/intangible-investment.pdf)[147]: ABS, Australian System of National Accounts, Cat. No. 5204.0 (https://www.abs.gov.au/ausstats/[email protected]/mf/5204.0)[148]: Barnes P and McClure A (2009) Investments in Intangible Assets and Australia's Productivity Growth, Productivity Commission staff working paper (https://www.pc.gov.au/research/supporting/intangible-investment/intangible-investment.pdf)[149]: ABS, Australian System of National Accounts, Cat. No. 5204.0

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Glossary

Absorptive capacityAbsorptive capacity is a business's ability to identify, acquire, transform and exploit knowledge that is external to the business. Measures such as research and development expenditure, number of researchers in the business and survey methods are used to measure absorptive capacity.

Applied researchOriginal work undertaken primarily to acquire new knowledge with a specific application in view. It is undertaken either to determine possible uses for the findings of basic research or to determine new ways of achieving some specific and predetermined objectives.

Business demographyBusiness demography statistics describe the characteristics and demography of the business population. A number of business populations are considered for the scope of business demography. These are the population of active enterprises, population of enterprise births, population of enterprise survivals up to five years, and population of enterprise deaths. For each of these populations, variables on number of enterprises, number of employees, and number of persons employed are reported.

Business expenditure on R&DBusiness expenditure on R&D (BERD) represents the component of gross expenditure on R&D (GERD) incurred by units belonging to the Business enterprise sector. It is the measure of intramural R&D expenditures within the Business enterprise sector during a specific reference period.

Cloud computingCloud computing is a type of computing that relies on shared computing resources rather than having local servers or personal devices to support applications. The services are delivered and used over the Internet and are paid for by the cloud customer on an as-needed or pay-per-use business model.

CollaborationThe Oslo Manual 2018 defines collaboration as requiring co-ordinated activity across different parties to address a jointly defined problem, with all partners contributing. It requires the explicit definition of common objectives and it may include agreement over the distribution of inputs, risks and potential benefits. Collaboration can create new knowledge, but it does not need to result in an innovation. These interactions can consist of informal contacts and information flows, or more formal collaboration on innovation projects. Collaboration relies on openness and knowledge sharing but also some level of focus and accountability on the part of the business organisations.

Competitive advantageCompetitive advantage is the leverage that a business or country has over its competitors. It is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices through differentiation. Competitive advantage can be attributed to a variety of factors including cost structure, branding, the quality of product offerings, the distribution network, intellectual property and/or customer service.

CompetitivenessAbility of a firm or a nation to offer products and services that meet the quality standards of the local and world markets at prices that are competitive and provide adequate returns on the resources employed or consumed in producing them. Competitiveness is gained through a set of institutions, policies and factors that determine the level of productivity of a firm or a country.

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Creative destructionThe incessant product and process innovation mechanism by which new production units replace outdated ones.

Digital innovationDigital innovation, or digital transformation, is the novel use of digital technology to increase the competitiveness of businesses and contribute to society's total productivity. It is the process of leveraging digital advancements to reimagine how business is done.

EntrepreneurshipEntrepreneurship is the capacity and willingness to develop, organise and manage a new business venture along with risks in order to make a profit. Entrepreneurial spirit is characterised by innovation and risk-taking. Despite definitional differences it is generally agreed that entrepreneurship is both a driving force of and a challenge for young startups that lack funds, human capital and relevant experience.

Experimental developmentSystematic work, using existing knowledge gained from research or practical experience, which is directed toproducing new materials, products, devices, policies, behaviours or outlooks; to installing new processes, systems and services; or to improving substantially those already produced or installed.

Framework conditionsThe efficacy of an innovation system often hinges upon the quality of framework conditions, namely the capacity to ensure an innovation-friendly environment. This is shaped not only by R&D but also by the interplay of factors which enable knowledge to be converted into new products, processes and organisational forms which in turn enhances economic development and growth. Framework conditions encompass the quality and reach of governance in a country, an effective banking and financial system, an honest and functioning judiciary, and working educational and health systems.

Full-time equivalentFull-time equivalent (FTE) is a measure of the total level of staff resources used by firms. The FTE of a full-time staff member is equal to 1.0. The calculation of FTE for part-time staff is based on the proportion of time worked, compared to that worked by full-time staff performing similar duties. While FTE includes full-time and part-time workers, it does not include contractors.

Government budget allocations for R&DGovernment budget allocations for R&D (GBARD) encompass all spending allocations met from sources of government revenue foreseen within the budget. Spending allocations by extra-budgetary government entities are only within the scope to the extent that their funds are allocated through the budgetary process. R&D financing by public corporations based on funds raised within the market and outside the budgetary process, is outside the scope of GBARD statistics.

Government expenditure on R&DGovernment expenditure on R&D (GovERD) represents the component of gross expenditure on R&D (GERD) incurred by units belonging to the Government sector. It is the measure of expenditures on intramural R&D within the Government sector during a specific reference period.

Gross Domestic ProductGross Domestic Product (GDP) is the total market value of goods and services produced in Australia within a given period after deducting the cost of goods and services used up in the process of production but before deducting allowances for the consumption of fixed capital. GDP, as here defined, is at market prices. It is equivalent to gross national expenditure plus exports of goods and services less imports of goods and services.

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Gross expenditure on R&DGross domestic expenditure on R&D (GERD) is total intramural expenditure on R&D performed in the national territory during a specific reference period. GERD represents the total expenditure devoted to R&D by the business, government, higher education and private non-profit sectors during a specific reference period.

Government Expenditure in R&DGovernment Expenditure in R&D (GovERD) represents the component of GERD incurred by units belonging to the Government sector. It is the measure of expenditures on intramural R&D within the Government sector during a specific reference period.

Higher education expenditure on R&DHigher education expenditure on R&D (HERD) represents the component of gross expenditure on R&D (GERD) incurred by units belonging to the higher education sector. It is the measure of intramural R&D expenditures within the higher education sector during a specific period.

High-growth firmsHigh-growth firms (HGFs) are defined by OECD as those with more than 20 per cent annualised growth over a three-year period, with at least 10 employees, where growth can be measured by the number of employees or by turnover.

Human capitalHuman capital is defined by OECD as the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being.

Industry sectorIndustry sector describes firms that operate in the same segment of the economy or share a similar business type. Industries have been defined in accordance with the International Standard Industrial Classification of All Economic Activities (ISIC), Rev.3. For national data, industries are defined according to the 2006 Australian and New Zealand Standard Industrial Classification (ANZSIC).

Information and Communication TechnologyInformation and Communication Technology (ICT) is the infrastructure and components that enable modern computing. Although there is no single, universal definition of ICT, the term is generally accepted to mean all devices, networking components, applications and systems that combined allow people and organisations (i.e., businesses, non-profit agencies, governments) to interact in the digital world.

InnovationIn this report innovation is defined as the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations. The latest version of Oslo Manual (Oslo Manual 2018) defined innovation as followsa new or improved product or process (or combination thereof) that differs significantly from the unit's previous products or processes and that has been made available to potential users (product) or brought into use by the unit (process).

Innovation activitiesBusiness innovation activities include all developmental, financial and commercial activities undertaken by a firm that are intended to result in an innovation for the firm. They include

• Research and experimental development activities

• Engineering, design and other creative work activities

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• Marketing and brand equity activities

• Intellectual property related activities

• Employee training activities

• Software development and database activities

• Activities related to the acquisition or lease of tangible assets

• Innovation management activities

Innovation activities can result in an innovation, be ongoing, postponed or abandoned.

Innovation capabilityInnovation capability is the ability of a firm to support the development of new products, services, processes and systems.

Innovation-active businessAn innovation-active business is one that has undertaken any innovative activity, irrespective of whether the innovation was introduced, still in development or abandoned during the reference period.

Innovation systemAn innovation system is defined as an open network of organisations interacting with each other and operating within framework conditions that regulate their activities and interactions. Three components of the innovation systemnetworks innovation activities and framework conditions, collectively function to produce and diffuse innovations that have, in aggregate, economic, social and/or environmental value.

Innovating businessAn innovative firm is one that has implemented an innovation during the period under review.

Intangible capitalIntangible capital is an asset that is not physical in nature and does not appear on the accounting balance sheet. Intangible capital includes assets such as data, software, designs, new organisational processes, management quality, R&D, patented technology, reputation (brand equity) and business-specific skills.

Intellectual property rightsClear intellectual property rights are vital for improving incentives to innovate in some industries, particularly in high-technology sectors where R&D plays a central role in innovation. Laws and regulations are part of the framework in which businesses operate. Common methods used for protection of intellectual property include Patents, Registered designs, Trademarks, and copyrights. Other methods include confidentiality agreements and trade secrecy, secrecy that is not covered by legal agreements, complexity of product design, and lead time advantage over competitors. IP rights can be licenced, optioned or assigned to third parties.

Knowledge economyThe knowledge economy is a system of production and consumption that is based on intellectual capital. It is an economy in which growth is dependent on the quantity, quality, and accessibility of data and information, which can be used in various fields to generate economic value.

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Management capabilityManagement capability refers of the capacity of organisations and their managers to effectively plan, organise productive activity, lead staff, and control the actions of the organisations in order to achieve its goals.

Marketing innovationA marketing innovation is the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing.

Nascent entrepreneursNascent entrepreneurs are people who are engaged in creating new ventures by committing time and resources.

New-to-market innovationNew to the market innovation includes innovations that are

• New to the world;

• New to Australia but not new to the world; and

• New to the industry within Australia, but not new to Australia or the world.

Novelty typesAll innovations must contain a degree of novelty. Three concepts of the degree of novelty of innovations arenew to the business, new to the market and new to the world. New to the business innovation is an innovation that has already been implemented by other businesses. A new to the market innovation is when the business is the first to introduce the innovation on its market (and market is defined as the business and its competitors and can include a geographic region or product line). A New to the world innovation is an innovation that is new to the world when the business is the first to introduce the innovation for all markets and industries, domestic and international. New to the world therefore implies a greater degree of novelty.

Organisation for Economic Co-operation and DevelopmentOrganisation for Economic Co-operation and Development (OECD) is a group of countries working towards common problems of increasing economic growth, welfare and social problems. The list is comprised of Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States.

OECD Frascati ManualThe Frascati Manual provides guidelines for collecting and reporting data on Research and Experimental Development.

OECD Oslo ManualThe Oslo Manual provides guidelines for collecting and interpreting innovation data.

Organisational innovationAn organisational innovation is the implementation of a new organisational method in the business's business practices, workplace organisation or external relations.

PatentA patent is a form of intellectual property which gives its owner the right to exclude others from making, using, selling, and importing an invention for a limited period of time. It can be granted for any device, substance, method or process that is new, inventive and useful. A patent is a legally enforceable right to commercially exploit the invention for the life of the patent.

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Private non-profit expenditure on R&DPrivate non-profit expenditure on R&D (PNPERD) represents the component of GERD incurred by units belonging to the Private non-profit sector. It is the measure of intramural R&D expenditures within the Private non-profit sector during a specific reference period.

Process innovationA process innovation is the implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software.

Product innovationA product innovation is the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user-friendliness or other functional characteristics.

ProductivityProductivity is the ratio of outputs to inputs. It can be measured at the level of the firm, industry or the whole economy. There are a number of ways to measure productivity. Labour productivity is where the only input being considered is labour costs. Multifactor productivity uses labour and capital costs and total factor productivity uses capital, labour, energy, material and services costs as inputs. Productivity growth occurs when growth in industry outputs exceeds growth in inputs.

Pure basic researchExperimental and theoretical work undertaken to acquire new knowledge without looking for long term benefits other than the advancement of knowledge.

Research and DevelopmentResearch and experimental development (R&D) comprises creative work undertaken on a systematic basis to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications. The term R&D covers three activitiesbasic research, applied research and experimental development. Basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view. Applied research is also original investigation undertaken to acquire new knowledge but directed primarily towards a specific practical aim or objective. Experimental development is systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed.

R&D intensityAt a country level, R&D intensity is defined as R&D expenditure expressed as a percentage of GDP on a national scale, or R&D expenditure expressed as a percentage of sales at the firm level. At a firm level, R&D intensity is defined as R&D expenditure expressed as a percentage of firm turnover.

ResearchersResearchers are defined as professionals engaged in the conception or creation of new knowledge, products, processes, methods and systems, as well as in the management of these projects.

Revealed comparative advantageRevealed comparative advantage (RCA) is an index calculated using exports, providing a measure of relative specialisation of a country's export activities in an industry. The RCA is calculated as the proportion of a country's exports in a product or industry divided by the proportion of world exports in that product or industry. If the RCA is greater than one, a comparative advantage is 'revealed.' If the RCA is less than one, the country has a comparative disadvantage in that industry.

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Social mediaSocial media is computer-based technology that facilitates the sharing of ideas, thoughts, and information through the building of virtual networks and communities. By design, social media is internet-based and gives users quick electronic communication of content.

SpilloversSpillovers refer to unrequited flow of benefits to third parties. In the case of knowledge-based activities like research R&D, spillovers (or externalities) are produced when the knowledge generating activities of one business enhances the knowledge and capabilities of unrelated firms, and subsequently leading the production of better or cheaper goods and services, increased sales, productivity or other benefits.

StartupStartup is the early stage in the life cycle of an enterprise, where the entrepreneur moves from the idea stage to securing financing, laying down the basis structure of the business, and initiating operations or trading.

Strategic basic research Experimental and theoretical work undertaken to acquire new knowledge directed into specified broad areas in the expectation of practical discoveries. It provides the broad base of knowledge necessary for the solution of recognised practical problems.

Value addedThe amount by which the value of an article is increased at each stage of its production, exclusive of initial costs. In national accounts, value added is often obtained by deducting intermediate consumption from gross output.

Venture capitalVenture capital (VC) is defined as high-risk private equity capital for typically new, innovative or fast growing unlisted companies. A venture capital investment is usually a short to medium-term investment with the intended return often in the form of capital gains (rather than regular income streams). Early stage VC is often invested in development, testing or pilot production. At this stage the investee company may not be fully operational and may not yet be generating revenue. Expansion VC is invested at a stage when developed products are in the market and the investee company has significant revenue growth and may be approaching, or at, profitable operating levels.

Vocational education and trainingVocational education and training (VET) is a form of tertiary education that provides accredited training in job related and technical skills. It covers a large number of qualifications across industry sectors.

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